Don got his start in the industry by knocking doors to sell security. An investor told him to do that same thing with real estate. He took the advice and ran with it, knocking on doors to find properties to buy, eventually getting away from the door knocking and scaling a large real estate investing business. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“When people lose money on an asset, usually it’s because they couldn’t execute internally and over extended themselves” – Don Wenner

Don Wenner Real Estate Background:

CEO of DLP Real Estate Capital, a family of real estate solution companies w/ 350 team members, 750MM in assets under management, and 100MM plus in annual revenue

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Don Wenner. How are you doing, Don?

Don Wenner: I’m doing great, Joe. How about yourself?

Joe Fairless: I’m doing great as well, and looking forward to our conversation. A little bit about Don – he’s the CEO of DLP Real Estate Capital, a family of real estate solution companies with 350 team members, 750 million in assets under management, and 100 million plus in annual revenue. They’ve got 10,000 unit owned, 12,000 homes and apartments acquired, and based in a couple places: Allentown, Pennsylvania, and Don, where are you located?

Don Wenner: St. Augustine, Florida. Just south of Jacksonville.

Joe Fairless: Just south of Jacksonville. First, Don, do you wanna give the Best Ever listeners a little bit more about your background and your current focus? And then we’ll go from there.

Don Wenner: Absolutely, so I’ll give the one minute or two version. I started in real estate probably like most people; I was a college student at Drexel University in Philadelphia, and I was actually spending my days knocking on doors… Literally, all day, knocking on doors while I was in college, for ADT Security. I became the number one sales rep in the country for ADT, and I was making 5k to 8k every two weeks; I thought I was on top of the world, I was 19-20 years old… And the guy who owned the company was in real estate. This was 2006. Everybody was in real estate in 2006… And he told me if I could sell alarm systems knocking on doors, I’d do great selling real estate.

So I got my real estate license, started selling real estate. That led to very quickly starting to flip real estate, which then at the bottom of the market led to building a real estate portfolio of single-family homes, scattered multifamily, all the commercial food groups… That led us to build a construction company to handle all the renovations, it led us to build property management to handle all the management, it led us to need to open private investment funds to bring in capital to fund all the growth… That led down a path of starting to lend capital to other investors and growing a large lending business, and then further writing equity and partnering with other operators.

To fast-forward all that now to today, we have a family of 350 team members across eight total companies, headquartered, as you said, in Pennsylvania, Florida, offices really throughout the East Coast… And having a lot of fun at it.

Joe Fairless: What do you miss about door knocking?

Don Wenner: [laughs] It was a lot of fun. The simplicity of the one appointment sale, the simplicity of you know on the door, you put your head down and shuffle and walk in that door, and you walk out with a signed contract and a commission check. The simplicity of that type of sale was pretty awesome. It was a great way to cut your teeth and learn the basics of sales… I’ve been having a lot more fun since then, but it was a great experience.

Joe Fairless: So how many units does your company own right now?

Don Wenner: We own somewhere between 10,000 and 11,000 right now.

Joe Fairless: And where are they located?

Don Wenner: We’re heavy in the South-East. We’re in a total of 15 states. We’re heavy from North Carolina down to Florida, we’re also heavy in Pennsylvania and New Jersey, because that’s where the company is headquartered, and we have a lot of relationships and assets… But we’re out as far West as Arizona, we’re as far North as South Bend, Indiana, but we’re in 15 total states and we own anywhere from 200 to 3,000 apartments and homes.

Joe Fairless: And how are you able to manage that process?

Don Wenner: Great question. It starts, of course, with great people. If you asked me where do I spend most of my time, the largest segment of my time is spent on hiring and developing leaders. We really build a culture of — our mantra is “Leaders made here.” So we build great leaders throughout the individual businesses, empower them to grow and take ownership and lead, and that’s been really the key to our ability to scale, both geographically, and the new business lines, and sitting in different seats with any of these different business lines and transactions.

Joe Fairless: And I’d love to talk more about that, but first just so I’m wrapping my head around this correctly… You said you have 350 team members. How many of those are W-2 employees?

Don Wenner: 325.

Joe Fairless: So you have 325 W-2 employees across eight companies. What company of the eight has the most employees?

Don Wenner: Property management.

Joe Fairless: Yes, of course…

Don Wenner: We have about 150 in property management.

Joe Fairless: Okay. And why have your own property management? Because I’m sure you did some pros and cons of starting your own management company.

Don Wenner: Yeah. To be honest, in the beginning, the types of properties we were buying – it was hard to find good management. When you’re buying 20-unit, 40-unit, 60-unit type properties, there’s really not good professional management out there. Or at least not that we were able to find in the secondary and tertiary markets we were in. So in the beginning, there really wasn’t any other option. And then as we grew, we evaluated and we’ve used third-party management, and we have some of our portfolio today, about 2,000 of our apartments we do a third-party management. But we still provide the construction management and the asset management.

But really, at the end of the day, your job running a business is operations, and your ability to execute is the key in any business, and certainly managing real estate is no different. I believe that my interest, my alignment and then the interest in generating profits at the asset level is always gonna be much greater than the interest level in the management company whose goal is to drive his bottom line.

So the alignment of interests are in place when you own your own management company, and then we believe strongly that by executing what we call our elite execution system, which is how we run each of our businesses, and the disciplines of executing, of hiring, of laying out our strategy and business plans and then doing the things every day, building the right forms of communication, solving issues, managing your top priorities – the way we’ve built that throughout our organization allows us to get significantly better results than any other management company we’ve been able to come across.

Joe Fairless: And since that’s the case, why have 2,000 units be with third-party management?

Don Wenner: When we go into a new market – for example, we’ve gone into Arizona, and we didn’t own anything within six or seven hours of this new community we just bought in Arizona… So in that specific case we didn’t have any infrastructure in place yet, we didn’t have any relationships yet, we didn’t have any contractors yet… So it was in easier — in that case, actually, it was one of the rarest situations where we bought a property that already had pretty good management in place… So it was just a lot easier to keep that third-party manager in place initially. They already had the knowledge of the asset, the knowledge of the market, the knowledge of the people… Than to force change, and with all my senior leadership being remote – it made it a lot more challenging.

So generally we’ll bring in third-party if it’s a new market to us, we don’t have experience… And then if they do an incredible job, we’ll keep them. If they don’t, then we take over the management.

Joe Fairless: So let’s talk about the Phoenix portfolio or property. Can you tell us some details about it?

Don Wenner: This property is actually right outside of Tucson, and…

Joe Fairless: Oh, Tucson. Arizona — I made a poor assumption.

Don Wenner: [laughs] So this is a 196-unit built in 1997, class B community, in a class B+ neighborhood.

Joe Fairless: Okay. And how did you find the deal?

Don Wenner: I actually bought it through an auction platform. So we’ve actually done pretty well buying through auction platforms, because generally, especially this platform, you have to wire a 10% deposit, and it was a 14 million dollar deal… A 10% deposit within 24 hours of winning the auction, and you have to close in 21 days with no contingencies.

So generally, what we joke is smaller operators generally don’t have the ability or the confidence that they can pull the money together that quickly, and the big guy, the guy sitting in New York, generally the big Wall Street funds, they generally can’t get the contract signed in 21 days, let alone close on the asset. So we’ve generally done very well on those types of deals, with very short timetables and very hard terms.

Joe Fairless: That’s interesting. What platform is it?

Don Wenner: Real Insight Marketplace.

Joe Fairless: Okay. How many deals have you bought from Real Insight Marketplace?

Don Wenner: Five or six.

Joe Fairless: And the first one, how did you get comfortable with buying the first one off of an online auction? …I assume it’s an online auction platform.

Don Wenner: Correct. You have to be willing to invest and do your homework upfront. So you have to be willing to invest, and doing your due diligence, getting out to the asset, doing everything upfront when you know there’s a good probability that you’re not gonna win the auction. You have to make that investment to get to the point of 100% confidence before the time of submitting your offer, so that then you’re confident in the asset and in your underwriting, but also in your ability to close quickly, and understanding all the hair that could come up as you’re finalizing up your capital structure and getting the deal closed.

Joe Fairless: So what do you do, tactically speaking, to get 100% comfortable with purchasing a property where you’ll have 21 days to close with no contingencies?

Don Wenner: I’d say the first place for most people who start is you have to confident you have your capital in order. That’s the first thing that we focus on. Beyond that, it’s understanding the asset and the market at a high level. Generally, our due diligence process consists of a team going out to the asset, or an acquisition team, our construction management team, our asset management team… In this case, this property didn’t have a heavy redevelopment component, but when they do, generally bringing contractors, and often bringing — our third-party is bringing an engineer out right away, if there’s not already one. In this case there was. Getting the phase one done on the property before you even have it tied up…

But bringing a full team out there, spend a couple days, walk through every single unit, dive deep into the asset, do your full lease audit and evaluation of the financials upfront… And then getting out to the competition. That’s really a big part of it. Truly understanding the market… This was, again, our first deal in a new market, so getting to know the market, getting to know the competition, getting to understand the demand, getting to understand the larger employers in the market, understanding the demographics, understanding the tenant base, and getting comfortable that we’re gonna be able to continue to execute over the 5 or 7-year business plan that we’re laying out for that property.

Joe Fairless: Approximately how long does it take to complete this part of the process for you? I know on the ground you said a couple days, but I imagine the lease audits, and looking at the financials – that takes a little bit longer.

Don Wenner: Yeah, if we’re under a short timetable, like on a deal like this, we’re generally gonna complete the whole process, start to finish, in about seven days. Like most, we’d prefer to have a little more time, but when we’re operating under a short timetable, generally we’ll complete the majority of our due diligence in about a week.

Joe Fairless: And what part of what you’ve just said — are there still some lingering things that could bite you in the butt, just because you were having to compress your timeline to seven days?

Don Wenner: Yeah, it’s a great question. Like any deal, we look at it as — a deal or an asset can be a great asset at one price, and a terrible buy at another price… So one of the great parts of buying on auction platforms generally is you’re picking up assets at a lower basis, that gives you a little bit more room. So anything we’re not 100% confident we’ve nailed down, then we just assume the worst in our underwriting. We’ll assume the worst on what it’s gonna cost us, or if we’re not 100% confident with what rents we’re gonna be able to drive through an upgrade package, we’re gonna assume the most conservative side of our analysis, and max out our max bid based on a more conservative underwriting.

So generally, the more holes we have in our underwriting at the point of the auction, the lower our bid is gonna be, which can result in us getting a better buy, or of course, can result in us losing out, because we weren’t able to complete and check every box in our underwriting, so we came in more conservative.

Joe Fairless: I believe you said you’ve closed on six properties on that auction platform… Did I hear that right?

Don Wenner: On that specific auction platform, yeah. We bought many, many on multiple different auction platforms, but on that specific one – yeah.

Joe Fairless: Okay. On that platform, approximately how many bids have you put in to get those six closings?

Don Wenner: We’ve probably bid on 15 assets to win those 5 or 6.

Joe Fairless: Oh, so 15 which includes those six, or 15 that you didn’t get? Wow…

Don Wenner: Correct. So we have a 33% to 40% hit rate generally on auction deals that we decide to bid on. We feel we have a good chance at it, and we do all our homework upfront to determine what the whisper price is, what the reserve price is, really where is the thing gonna shake out, to know if it’s something we’re gonna put forth all that energy and effort around.

Joe Fairless: If you mobilize your crew to go do that 7-day exercise and go visit the property, and do the lease audits, do you generally then move forward with making an offer?

Don Wenner: Generally, yes. There’s certainly exceptions to the rule. You come up with something you just don’t wanna tackle or deal with. It’s usually less about the physical asset, and it turns out that an issue with the neighborhood that we don’t wanna tackle, whether that be crime, or drugs, or just we see negative trends in population growth, or socio-economic changes going on that we don’t feel confident in the basis, that we didn’t have the most accurate assumptions before we got out to the asset. That’s generally what happens. It’s less about the asset than the neighborhood.

Generally, we like to buy C+, B- assets, in B+ or better neighborhoods. So if it turns out to be a neighborhood that we don’t think we’re gonna be able to control or change, then that can be what turns us away from an asset.

Joe Fairless: What online platform have you bought the most properties on?

Don Wenner: In terms of multifamily communities, we’ve bought on many of them. But I’d say the one we’ve historically been the most active on has been 10X.

Joe Fairless: How many would you say you’ve closed on that?

Don Wenner: Maybe 15.

Joe Fairless: Any recent ones?

Don Wenner: I don’t think we’ve won any in 2019. In 2018 we definitely bought a number of assets. I know we’ve been the bridesmaid on a few this year, but I don’t think we’ve won any this year.

Joe Fairless: And any nuances that you’ve identified from one auction platform compared to another, that you think would be relevant to share?

Don Wenner: I’d say some of them have more flexible terms, but the more flexible the terms are, generally the higher the price is gonna go. For example, on 10X they’ve started providing debt options, or giving you time to place debt… Which, as an operator, of course, that’s a great thing. We actually, on the lending side of our business, have funded a ton of auction deals for other operators, because we’re one of the few lenders who will close loans in 20 days. So it’s actually been a huge source for us not only to buy deals, but actually to fund deals to other operators. And some of the auctions that we’ve lost out on, actually we’ve ended up funding the guy who won the auction. And because we already underwrote the property, we were comfortable with it and we could close in 21 days. That’s happened many times. More times that we funded other guys buying deals than we’ve bought them ourselves.

But when auction platforms start saying “Hey, we’ll give you a 30-day extension, we’ll give you 60-day terms to place financing”, or sometimes they’ll say “Hey, we’ll give you unlimited time, as long as you’re working with our lending partner” – that’s generally when everybody realizes “Hey, I can have a lot time. I have time to go place debt, I can go get financing.” Then that opens up the buyer pool times three, four, five or ten. If they had to close in 21 days, or even 30 days, they wouldn’t be bidding. When that happens, generally we’re not able to be the buyer, because people are gonna be willing to overpay, when they can go out there and place some CMBS debt, or something that operators will use to get interest-only 10-year paper, and they can justify paying prices that to us don’t make sense.

So we actually love [unintelligible [00:16:52].15] as an operator, and we love it as a provider of debt and equity. The other guys — when there isn’t time typically to place financing, that’s where we can excel and get the best deal and bring value.

Joe Fairless: And what makes you like a deal as a lender, but not like the deal as an operator?

Don Wenner: That’s a great question. I’d say if one of our partners or borrowers comes to us with a deal that they wanna fund, we don’t compete against them. A lot of times we do like the deal a lot as a lender, but in many cases we’ll go and provide equity to them as well. A big majority of deals where we provide debt to, we end up providing the majority of the equity as well. So a lot of times when deals do come to us for debt, we really do like them and we provide them with capital as well.

We just had a deal – it was an auction deal – this past week that we were bidding on, and then we found out one of our close partners that we do a lot of business with was bidding on the same deal. We didn’t bow out, but we strategized with them and we still put out an offer, but we purposely put out our offer to be inferior terms to the partner, to help his offer actually look better, and we actually helped him win the deal. Then we ended up coming in and we’re providing both the debt and we’re providing 90% of the equity on that deal, but we’re doing it with another operator; we’re allowing him to run and manage and execute on the property.

Another case is we’ve had situations where we’ve put offers in on a deal, we lost out, because somebody else was willing to pay a little more, and then we found out who the winner is and we come and offer them capital into the deal. We’ve operated that way as well many times.

Joe Fairless: Tell us about the deal that you’ve lost the most amount of money on.

Don Wenner: Yeah, good question. I can’t really say I had a deal that I’ve lost a lot of money on. We certainly had some single-family flips, we’ve done a couple thousand single-family flips… One that comes to mind – we’ve renovated a house, start to finish, beautiful house, sold it; it was like a 350k house. And a week before closing, a realtor or an inspector doing the inspection – we never identified who did it – turned off the emergency heat switch and shut off the heat, and the whole house froze. It was a long story, but the insurance company didn’t cover it… So we ended up having to re-renovate this entire house, to the tune of about 80k. So it turned it from a 40k profit to a 40k loss. That’s the biggest loss that I can think of on any property we’ve had.

We don’t have a lot of times we’ve lost money. When I think about bad deals, where my mind goes with deals gone bad is generally doing deals with people I don’t wanna be in business with, and I think that’s the mistake that people often make. A deal can go bad because you’re stuck with a partner who restricts and doesn’t provide the capital, or doesn’t agree with the business plan, or slows things down, or won’t make decisions, or whatever the case. Or just makes your life miserable.

In the early days, like a lot of people, when we first got going, we would partner with anybody who had capital… And we worked with some lousy partners in the beginning, that really made deals unenjoyable, and sucked some of the profits out, because we had to move so slow, answering questions, and getting their feedback, and getting their approval on decisions… It really slowed us down. So that’s been the bigger challenge in our early days, and why we really committed to raising our own private funds that we had complete discretion and control of, and then being able to go out there and offer capital to others with complete control. It’s been a huge reason why we have not dealt with those issues since our early days, and why we haven’t had issues of major losses on deals. It’s a big part of it, because we do business with people we wanna be in business with.

I think building relationships with people is a huge part of success, but the other point I wanna make is I think generally when guys lose money on a property, generally it’s not that the property was a bad piece of land, or a bad asset… Generally it’s not that they bought it at a bad price. Generally it’s not that they didn’t understand construction, or they didn’t understand property management. Generally it’s not that the market turned on them. Usually it’s that they couldn’t execute internally. They tried to take on too many projects at once, and they just couldn’t handle them. They over-extended themselves.

They didn’t have any structure in their organization to stay on top of the important things, and time started going by, and things didn’t get done, they forgot to pull their permits, and then they had to go backwards, they hired a new project leader and put them in charge of the project and he completely screwed up because they hired the wrong person; they didn’t really train them, they didn’t really manage them… They didn’t have a way to scale. And what I’ve seen is when guys go from being successful home flippers or whatever type of investor and wanna scale and grow a business, they tend to struggle not because they don’t understand real estate, but because they don’t know how to scale a business. They hire the wrong people, they don’t partner with the right people, they don’t build the internal processes to execute in their organization.

They don’t have a way to drive communication as their organization grows, they don’t have a way to set priorities, they don’t have a way to solve issues, they don’t have a way to keep out the noise and stay focused on what really matters, and they end up overextending themselves. And even though they may be doing a decent amount of business, they end up starting to have losses, they end up starting to be inefficient, they end up starting to take longer than it used to take them, and they start running a business that’s no longer profitable like it was in the beginning. That’s what we see more times than not, especially over the last number of years, where the market has been so great.

Don Wenner: My best real estate advice ever kind of ties to my last comment, and it’s two parts. Number one, be in business with people you like. The Chug Test I heard recently by Steve Sims, who wrote Bluefishing, the Chug Test – don’t hire anybody or do business with somebody you wouldn’t wanna go and grab a beer with. So be in business with the right people.

And focus on building the internal operations of your business, and it’ll take care of everything else if you focus on execution in your organization.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Don Wenner: I read 3-4 books every week, but my best one I’ve read recently I’d say is Turning the Flywheel by Jim Collins.

Joe Fairless: And what have you implemented in your business from that book?

Don Wenner: Turning the Flywheel is a little monogram, as he calls it, an add-on to Good to Great, and I’m a huge Jim Collins fan. He doesn’t really teach anything new in this book, but what he does is he crystallizes a lot of his teachings – Good to Great, and Great by Choice, and How the Mighty Fall – and really lays it out in a really clear basis.

The biggest thing I’d say I implement is he [unintelligible [00:23:26].28] that you need your organization to be discipline-centered. He calls it disciplined thought, disciplined action, disciplined people. He just does an amazing job of crystallizing and explaining that, and then he breaks out all his different tools and things he teaches: the hedgehog principle, the flywheel etc. and breaks them out in a really organized fashion. It’s a tiny little book, it takes an hour and a half to listen to, but his strategy simplified in a little tiny book – it’s amazing.

Joe Fairless: Best ever deal you’ve done?

Don Wenner: The next one I’m gonna do.

Joe Fairless: What deal have you made the most money on, and how much did you make?

Don Wenner: I’d say a deal we’re actually selling in 3-4 days is gonna be the most profitable single deal. We bought a property for seven million dollars in Orlando, and we’ve put about a million dollars into it, so eight million total cost, we put two million equity and six million debt, and we’re selling it for 15 million. We’re gonna return an 8 million-dollar profit on a two million dollars investment in a little over two years.

Joe Fairless: A couple things that you did to increase the value that greatly are what?

Don Wenner: Management was the big play there. Really, really poor management, and a really, really poor tenant base. So we’ve spent a lot of energy and effort to turn over the tenant base, and put the right people in place there on our end, on the management side, and changed it from — when we bought the property, there were multiple shootings on the property the previous year, there were a lot of drug issues, there was unfortunately a rape on the property… And we really focused heavy on putting security in place, not allowing that type of behavior to continue, getting rid of all the troubled tenants. We turned it around over the first year and really drove up not only the occupancy and the quality of tenants, but the rents as well.

Joe Fairless: Best ever way you like to give back to the community?

Don Wenner: About two years ago I launched a foundation called DLP Positive Returns Foundation, and we focus on two epidemics that we believe to be epidemics in America. One is the affordable housing epidemic here in America, that’s frankly getting worse every day, and second is attacking the job epidemic; that we’re losing jobs to technology at a rapid pace, and I believe the only way to solve for that is through entrepreneurship here in the States.

So we’re really focused on those two causes, supporting a lot of other great organizations, both in terms of monetary capital, but then also I teach our operating system, our elite execution system – which I’ve just finished our book called Building an Elite Organization – and I go and I teach that to social entrepreneurs and help them grow their causes. It’s been incredibly rewarding.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get your book, Building an Elite Organization?

Don Wenner: Email is the fastest way to contact me: don@dlpre.com. And of course, you can find us on all the social platforms and such as well. Our website is dlprealestate.com.

Joe Fairless: That’s how they also can get the book?

Don Wenner: Yeah, so you shoot me a quick note to my email address, and as soon as the book is going live, which is gonna be January 1st, you shoot me a note and we’ll send you out a copy of the book.

Joe Fairless: Awesome. Congratulations on the book, and also clearly congratulations on the real estate business. I really enjoyed learning about the approach you’ve taken to acquisitions on the online auction platforms, and what you do to mitigate risk as much as you can, what would be a reason why you would pull out – not necessarily about the property, but really about the market, because it’s very challenging to change that… And then the approach that you take from a mindset standpoint, and how you’re continuing to learn, you’re annihilating books on a weekly basis. Very impressive.

I really appreciate our conversation, I enjoyed it. I hope you have a best ever day, and we’ll talk to you again soon.

Andrew is here to add some value that we don’t get a lot of on this show. We cover a lot of investing areas, but mobile home parks are not a common subject. That changes today and Joe and Andrew dive into his investing story and then get into specifics on a couple of mobile home park deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“When buying a mobile home park, due diligence is very, very important” – Andrew Keel

Our fourth annual conference will be taking place February 20-22 in Keystone, CO. We’ll be covering the higher level topics that our audience has requested to hear.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Andrew Keel. How are you doing, Andrew?

Andrew Keel: Good, thanks for having me on the show.

Joe Fairless: My pleasure, and looking forward to our conversation. A little bit about Andrew – he’s a mobile home park investor and has been one since 2015. He owns and operates 971 lots in 16 parks across seven states. He’s based in Orlando, Florida. With that being said, Andrew, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Andrew Keel: Yeah, definitely. I started out actually rehabbing and flipping houses down in the Orlando Florida area. I also was wholesaling… Eventually, through my marketing efforts, I came across a couple of mobile homes that were very cheap, and I didn’t really know what to do with them, because they didn’t have a deed. They were a lot different, because they were personal property, kind of like a vehicle; they have a title. So I ended up doing some research and on YouTube I found a guy by the name of Lonnie Scruggs, who wrote this book called Deals on Wheels, which I highly recommend, and I ended up reading. It just talks about buying mobile homes, and selling them on contract, and creating mailbox money.

I ended up buying about 19 of those individual mobile homes, selling them on contract, and then through the process I met a couple park owners. One of them told me the real wealth is built through owning the land, not the individual mobile homes. That was like a game-changer for myself, and I instantly just dove in — I went to Frank and Dave’s bootcamp, I went to another mobile home park specific investing bootcamp, and dove in. I was fortunate enough to have the wholesaling background, so I was cold-calling and sending letters at the same time to find motivated sellers. I ended up at the Frank and Dave bootcamp actually meeting some passive investors that wanted to invest in deals. We put some deals together; since then we’ve done five deals together with the guy that I actually met at the bootcamp, and I’ve brought on other JV partners since then, and other private equity partners from doing syndications and so forth.

So it’s been an awesome ride. We’re looking to continue buying properties, larger properties. We just closed a few months ago a five-part portfolio, and we have a couple under contract now, so… Just continuing to grow and acquire more affordable housing units.

Joe Fairless: Where is the five-park portfolio located?

Andrew Keel: That is in LaSalle County, Illinois. It’s about an hour and a half west of Chicago.

Joe Fairless: Tell us about that deal.

Andrew Keel: So that deal – it was a pocket listing through a broker. We ended up doing quite a lot of due diligence on it, and negotiations were very slow. From when we actually went under contract it was March or April, and then it ended up closing in December of 2018… So it was just a long, drawn-out process. The sellers really wanted to go through and vet everything through their attorney, so… It kind of dragged on a little bit, but thank goodness we did. We were able to get a decent concession from the seller after due diligence and doing some research.

I actually moved on-site February, March and April of this year, and through that process we bought and brought in 23 used mobile homes, along with 17 brand new mobile homes. Just a massive infill project, value-add to the max… And now our property is worth about double, so I’m really excited about that property.

Joe Fairless: You’ve given me so many things to ask questions about. Thank you for that. [laughs] Okay, a lot of due diligence you said was done on that… Will you elaborate?

Andrew Keel: Yes. When you’re looking at five parks versus just one, it’s very intensive, because you have to look at the utility infrastructure of each… When buying a mobile home park, due diligence is very, very important. Utility infrastructure specifically can make or break a deal. So some of the properties had private utilities, which means that they would have a well, or a septic that we would be required to maintain… So we did specific inspections through experts in plumbing and electrical in those private utilities to make sure that the infrastructure was intact and was going to last in the future… And if it did need repairs, what was the number that we needed, either as a concession from the seller, or that we would need to budget for to improve it moving forward.

Joe Fairless: Is it ideal to have public infrastructure?

Andrew Keel: 100%. If you can get city water, city sewer, that is the best type of park to buy.

Joe Fairless: Okay.

Andrew Keel: Some of our parks — just because they’re city water, city sewer doesn’t mean that that’s the end-all, because most of the parks are master-metered, meaning there’s just one bill that comes in from the local utility company that charges the park for all of their usage, usually for water and sewer… So then what a lot of park owners should do – if they haven’t already – is sub-meter; put individual meters on all of the homes, and then read those meters on a monthly basis and bill the tenants based off of their usage.

A lot of the mobile home park owners today are mom and pop owners, and they don’t have it sub-metered, and they just include the utilities with lot rent, so that’s a value-add component that we can add immediately when we buy these properties to increase the asset value.

Joe Fairless: So utility infrastructure was one thing that you did… And you said there five different parks. How far away are they?

Andrew Keel: They’re about 20 minutes apart from each other. Two of them are very close together… But they were a good distance apart, so when we would set out — when I was on location, I’d literally be hopping from park to park every day, and it made for long days.

Joe Fairless: What’s the smallest lot and what’s the biggest lot of the five?

Andrew Keel: The smallest one had 31 lots, and the largest had 78.

Joe Fairless: So what were some unique things that you came across from a due diligence standpoint that you wouldn’t normally come across if they were just all in one location?

Andrew Keel: That’s a great question. One of the items is — we’ll go back to the private utilities, because that’s where most of our headaches come from…

Joe Fairless: Okay.

Andrew Keel: One of the properties that was probably in the best city in terms of demand and size and employers – it had both private utilities; it had well and septic. So that just – for a lack of better terms – opens up a can of worms… Because you’re now charging people — we go in and sub-meter that park, because it wasn’t metered… So now we’re charging people for their water usage to basically cover our costs to run both the well and the septic… And the septic system was an aging system (we knew that going in), and we had three different excavations/septic expert companies come out and inspect this system… And one of them told us we had a 50/50 chance at surviving and lasting another 5-10 years, and then the other two said it was completely fine.

So with that information we had to make an educated decision on negotiating with the seller as to that septic system. We basically got the seller to guarantee the system for a period of 12 months, and if it failed during that 12 months, they agreed to pay a certain amount of money to help with either a new septic system we would have to install, or connecting the city sewer, which is by far the best bet.

Unfortunately enough, the septic system went bad in the spring, when we have the high water table… Luckily, we did have that guarantee–

Joe Fairless: Unfortunate for them, but really fortunate for you, I imagine…

Andrew Keel: It is, and we’re in process now, working with engineers to get it hooked up to city sewer, which is by far gonna be a way better situation… But yeah, that’s just the kind of stuff that we have to deal with. Actually, all of the other parks have public water and sewer, so that right there makes it a good deal. That was the only one that was kind of a headache.

Joe Fairless: How much does it cost to get it hooked up to public?

Andrew Keel: It really depends on the distance away from where the current main line is. In this situation it’s gonna cost roughly $200,000.

Andrew Keel: It makes sense. Even if we would have paid that extra 200k, the purchase price made sense. We’re purchasing these at a 10%-11% cap, so the returns were there, it was just — mainly the project management of now having to oversee that is the painstaking process… But on the other end of this, the property will be worth maybe 8% or 9% because now it has that connection.

Joe Fairless: Right. And you mentioned earlier that you got concessions from the seller, so clearly that was one thing where you had that contingency… Anything else?

Andrew Keel: Some of the electrical… We always inspect the electrical in these parks, and a lot of these parks were built in the ’70s, so they have older electrical infrastructure… And a couple of the parks actually had electrical issues, that weren’t immediate — it wasn’t like “Oh my goodness, they don’t have power”, but they were rusted meterbanks and things like that, that needed to be addressed to help us out. So they agreed, they had an electrician that was going to take care of all of that before closing… And that unfortunately didn’t happen, so we had to put some money in escrow at closing and oversee that project to make sure that it got finished… Which it did, it just took a little bit longer than we would have liked.

Joe Fairless: And you moved on-site for three months… Tell us about that.

Andrew Keel: Yeah, my wife is by far — she’s fantastic.

Joe Fairless: Very understanding.

Andrew Keel: Very understanding, very flexible, and she gets what we’re building, so I’m so thankful to have her in my life. Her and my two-year-old daughter moved up to Ottawa, Illinois, and we rented a little Airbnb up there, a nice little spot… And they moved up with me, and I was working on the parks day in and day out.

The main thing – when we purchased the property, there was poor management in place. There was one manager overseeing all five parks, and it was kind of like chaos. Every day you would talk to her there was some new fire that she was putting out… So we ended up putting a new on-site manager at every property. That instantly gave us eyes and ears in each of the five properties, and helped with our communication of what was going on inside of those locations. That helped tremendously.

Joe Fairless: What are some benefits from a bottom line P&L standpoint that you saw as a result of being there for those three months?

Andrew Keel: Yeah, the toughest part in this business in terms of creating value is gonna be bringing in new homes and used homes, and also renovating existing homes that for whatever reason are not occupied, and in some sort of disrepair. Because unlike traditional multifamily and other asset classes, you can hire a general contractor that’s licensed, insured, and has been doing this and has a track record of doing these construction projects… However, when you’re renovating mobile homes and doing work on mobile homes you get a different quality contractor, and they require more babysitting, quite frankly. And with that, if you’re on site, you can save yourself money, compared to being a thousand miles away and trying to make a decision off of photos or walkthrough videos.

So we’ve been burned and learned from that experience, and found out that it’s just so important to be on-site. We saved thousands of dollars being able to point out, “Hey, you did replace the glass in this window, and you can send me a picture showing me you did that, but if I didn’t walk through after you did that, I wouldn’t have noticed all of the broken glass that’s now laying on the ground… Just laying there. You sent me a picture of the window and it looks good”, right? Normally, people would just send out a check. But since I can go now to that property, I can see the glass laying on the ground and making the property look worse. A little kid can come and cut themselves. So that’s the kind of stuff that we’ve found being on-site really helps us out with.

Joe Fairless: You’ve mentioned bringing in used homes and new homes are one of the hardest parts… Will you elaborate on what you’re talking about?

Andrew Keel: Sure. When you’re bringing in used homes – I’ll start there, because I started out, my background as a [unintelligible [00:13:54].22] helps me where I can access used homes very quickly. If you talk to anybody in the mobile home park space, they’ll tell you that used home inventory is very small, and they have trouble finding used homes to fill vacant lots. So with that, I actually find several used homes in a given week through different avenues, and I used technology to do so, and have different marketing tactics to be able to do that… So that’s a process in and of itself, to find the used homes.

Then you have to hire a transporter to go tear it down, put axles on it, put the hitch on it, get it moved into the park… And then you have to hire an installer to then block-level, tie down, put skirting on it, steps… And then you also have to get all the utilities hooked up – electrical, plumbing, gas if there is that… So it’s a multi-stage process, and as with any project management, there’s gonna be some time involved with that, and being on site is very helpful in that aspect.

Bringing in new homes – there’s HUD laws per each state with new homes, of how the site prep needs to be set up, meaning the lot… If we need to pour concrete down below the frost line – that’s something that needs to be done prior to the home even being brought in… There’s just different regulations that HUD requires for brand new homes, so making sure you have an experienced transporter and installer to install the homes is very important, otherwise you can have brand new homes just sitting there, not occupied because they haven’t passed inspection… And obviously, that’s just a waste of time and money.

So having all those things happen at once, in a period of three months, was a little ambitious, I’ll be honest. We’re still working on some of those projects, but overall occupancy and demand for these mobile homes is so off the chart that we’re definitely profitable, so that’s great.

Joe Fairless: What are some common reasons why homes don’t pass inspection?

Andrew Keel: Number one – this is for new homes – the grading of the ground has to be so that water doesn’t sit underneath of the homes. Even though there’s skirting around it, if water can sit under there, that’s a reason the inspector doesn’t like it. It can attract mosquitoes, attract moisture, which then would rot out the sub-floor… So you have to have proper grading, and you also have to have the concrete runners that meet the local code, which would depend on the depth of the frost line. In Illinois we had to go 48 inches deep with concrete runners, so that when it does freeze and thaw it’s not going to adjust the level of the home. So those are just a couple reasons…

Joe Fairless: What’s a project you’ve lost money on?

Andrew Keel: Projects I’ve lost money on…

Joe Fairless: Or maybe the most money. Let’s go with that – which ones have you lost the most money on.

Andrew Keel: Lost the most money on… We’ve been very fortunate in the mobile home park space where we’ve bought some off-market properties, so thank God we haven’t lost money in the mobile home park space… However, when I was a home flipper in Central Florida here I bought into a property, I paid too much for it, and I was able to sell and not make all of my money back. I think I lost about 4k-5k on that property… I paid too much for it going in, took a chance, and ended up losing a bit of money there. And you don’t account for the time that you lost as well, of getting that property ready.

So yeah, it was 4k, but really that was 3-4 months of work that also went into that, so it was quite a bit more than that.

Joe Fairless: How are you finding off-market mobile home parks?

Andrew Keel: We start out cold-calling…

Joe Fairless: How do you know who to cold-call?

Andrew Keel: Cold-calling – it’s pretty simple; you can type in “mobile home parks” into Google, into a certain search criteria, based on a certain area, and then you just basically call off of the Google Places numbers. A lot of the times you’ll reach managers, and you have to somehow strategically get them to present your information to the seller…

Joe Fairless: How do you do that?

Andrew Keel: I try to just build rapport with them, and kind of get them to like me, kind of prove that I’m not just joking around, or a joker-broker kind of thing… I try to build rapport, and then if they don’t wanna give out the owner’s information – which is ideal if they will – then I will sometimes mail a letter to the tax assessor address on file for the owner, after I talk to the manager. I mail them a letter to where they get their tax bill and say “Hey, I’m interested in buying the property. If you’re interested in selling, please give me a call. If not now, sometime in the future.” We’ve had success with that.

Joe Fairless: How do you transition the conversation when you call the mobile home park, from “Hi, my name is Andrew” to “What is the owner’s contact information, so I can reach out to him/her?”

Andrew Keel: Yeah, that’s a great question. Usually, when I call I try to downplay it and just say “Hey, this is Andrew. My wife Katie and I are interested in buying this mobile home park. We’re looking to get into the business and we like this area, and we like the size of this property. Would you be interested in selling?” And I ask the manager. I assume that they’re the owner.

Joe Fairless: Right, yeah.

Andrew Keel: And then they say “Oh, no, I’m not the owner. I’m the manager.” I say, “Oh, I apologize.” And then I just kind of talk in and say “Oh, well, how long have you been managing the park? What do you think about the business?” I just try to get them talking… And after a little while, they kind of elaborate and tell me about the owner a little bit, about how long they’ve owned it, if they own any other properties, what other business avenues they own, if local – because a lot of these parks are owned by local mom and pops that have other business ventures… One time they said “Oh yeah, he owns a car dealership, and this and that, but I can’t give you his phone number.” So I ended up calling the only car dealership and I got a hold of him… So there’s just ways to kind of get around.

Joe Fairless: Yeah, very resourceful. Your wholesaling days served you well, I imagine, in that regard.

Andrew Keel: My best real estate investing advice would be to go bigger faster, and to raise money faster. A lot of investors start out with their own money, and when they run out of money, they stop and they don’t look at continuing to acquire real estate. A good friend of mine – he has a nice little savings account, but he won’t put any of his money in deals… And he only raises money for all of the real estate that he purchases. There’s many different operators and ways of doing it, but I would just encourage people that your friends, family, potential investors out there – you’re doing them a disservice by not allowing them to invest with you, because the rate of return that they’re gonna get with you potentially could be a lot higher than any other program, or annuity, or CD that they could ever invest in.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Fairless: Best ever way you manage properties in seven different states, in terms of a process? What’s a best ever process that you use?

Andrew Keel: I would say we use a software called Slack; it’s our messaging software. Every single on-site manager is in their own channel, based on that property… And instead of phone calls, we make the managers communicate with us through Slack. That way, everything is in a nice, concise, little blurb, instead of talking with managers. Sometimes you’ll find that you’ll be on the phone for an hour when you only needed 30 seconds to get an answer… So that’s one process that I’ve implemented that has worked tremendously for us.

Joe Fairless: What about the reverse of that, where if you just jump on a phone call and you can get through it in five minutes, versus going back and forth on chat for 15?

Andrew Keel: To be honest, usually what happens when we hop on the phone is we end up talking about her sister’s brother who got in a motorcycle accident, and broke his leg… You’d be surprised, man. The conversations go on and on and on. So in Slack, there’s nothing really very complex that we discuss. It’s “Hey, did lot 29 pay?” It’s more like a yes and no type of thing, so… We don’t really have a lot of back-and-forth, I guess is what I’m saying.

Joe Fairless: Fair enough. What’s the best ever deal you’ve done?

Andrew Keel: The best ever deal I’ve done… I was able to secure seller financing on a property that I won in Ohio, and was able to secure 75% loan-to-value, 5% fixed. We have a 20-year note… And the property, when we purchased it, had like 40 tenants. We’ve been able to increase that just by implementing some marketing and some other strategies. Now we have 64 tenants… So that’s my best ever deal.

Joe Fairless: Best ever way you like to give back to the community?

Andrew Keel: Best ever way to give back to the community… I’m pretty active in church, so I give back through that. We also have an angel program my wife and I donate to for kids in the Dominican Republic.

Joe Fairless: Best ever way the listeners can learn more about what you’ve got going on?

Andrew Keel: Check out KeelTeam.com, my website. Always looking for new investors and partners. Even if you’re interested in the mobile home park business and you’d just like more information, I’d be happy to chat with you. You can go on my website and set up a free consult.

Joe Fairless: I enjoyed our conversation, I learned a lot… From ways new mobile homes wouldn’t pass inspections, or common things for why they don’t pass inspection – you talked about the grading of the ground – to getting your hands dirty and living in the area of something you closed on, and what you were doing to help the P&L statement… And then also the private versus public utilities and how much that could cost to actually connect into public… So – lots of stuff we talked about; I’m grateful that you were on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Chad has had a little different path on his way to real estate investing than I’ve ever heard. He started by getting into Magic The Gathering card trading, got into day trading, and then got into real estate investing. How has playing Magic The Gathering helped him with his career? Tune in to find out! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

If you’re a passive investor wanting to learn more about questions to ask sponsors in order to qualify the opportunities, sponsors, and the markets opportunities are in, visit BestEverPassiveInvestor.com.

We created this site just for passive investors to have a free resource providing the questions to ask and things to think through. BestEverPassiveInvestor.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Chad Kastel. How are you doing, Chad?

Chad Kastel: I’m great. How are you?

Joe Fairless: I’m doing well, and looking forward to our conversation. A little bit about Chad – his career is a day trader, and he’s been a real estate investor since 2016. His first property was a two-structure, single-property house-hack, and the second was a mixed-use triplex. He’s a licensed realtor in Florida, and he’s based in Hollywood, Florida.

With that being said, Chad, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Chad Kastel: A little bit about my background – I got into this card game called “Magic: The Gathering”, which is a strategic card game, and I think that was a foundation for me to get into day trading, which was also the foundation for me to get into real estate. My wife and I bought this two-structure property in Florida. We were house-hacking; we didn’t know we were house-hacking. It is a one-bedroom studio and a two-bedroom house. We lived in the studio and rented out the house for about two years, until we got pregnant. Then we got pregnant, and we moved into the house, and I bought my first real estate book in November, and then we ended up closing on a deal in January in Upstate New York. That’s where we’re at now.

Joe Fairless: Upstate New York… Aren’t you based in Hollywood, Florida?

Chad Kastel: I am, but I got my real estate license down here, so I could have access to the MLS… I looked at over 100 deals. I was trying to get a duplex or a triplex, and they all cash-flowed negative, except for two. Those cash-flowed positive at maybe $25.

Joe Fairless: [laughs] They were not appealing, huh?

Chad Kastel: No. We have all the information about how important cashflow is, and I decided I had to find something that fit what I wanted.

Joe Fairless: So what’s your connection with Upstate New York, besides a good property?

Chad Kastel: I had a business partner — we had [unintelligible [00:02:50].16] and he owns property up there, and I was just messaging him, kind of complaining about the ROI, and he was like “Oh, why don’t you look at Binghamton?” He owns property there, I did, and it just snowballed from there.

Joe Fairless: You’ve got some friends who went to Binghamton…

Chad Kastel: Not a bad area, besides the cold.

Joe Fairless: Right, yes. True. So explain to me — you said “Magic: The Gathering” card game led you to day trading, which led you to real estate… I think that’s how you connected the dots. Is that correct?

Chad Kastel: Yeah. It’s a long connection, but…

Joe Fairless: I’m not familiar with “Magic: The Gathering”… How has that helped you in business?

Chad Kastel: “Magic: The Gathering” is an information-based game, kind of similar to poker, where each player has information about each other, and you also have incomplete information… And from a young age it taught me the process of your decision-making is more important than the outcome, as long as that process was good. So it taught me essentially not to be short-term results-oriented. The example I use is if you’re late for work, but you find $500 on the street, that doesn’t mean you should be late for work again. You made a bad decision and it worked out, and vice-versa – you can make a good decision, and the game could not reward you, you could lose the game. So it taught me how to make those good decisions at around age 13.

Joe Fairless: Thank you for that. It’s interesting how that can be applied to life and business so directly. So the second was a mixed-use triplex, and that’s the one in Upstate New York?

Chad Kastel: Yes.

Joe Fairless: Tell us the numbers on that one, will you?

Chad Kastel: I bought it for $78,900 in January. As a commercial space, that’s rented. It’s rented for $800/month. I put about 5k into the two residential spaces to get them move-in ready. We’re just going through the process of now getting tenants in there. We’ve listed it at $875 each unit, which we pay for everything. The tenant doesn’t pay for electricity, or water…

Joe Fairless: All bills paid, huh?

Chad Kastel: Yeah. I think I’m going to eventually put a RUBS on and separate it, but I just didn’t do it for my first property. I expect after everything is said and done the property to net out about $800.

Joe Fairless: You’ve got a commercial tenant… What type of business do they have?

Chad Kastel: They’re called Paw Professionals and they are a dog grooming business.

Joe Fairless: And did you attract them to the property?

Chad Kastel: They’d been there for five years.

Joe Fairless: Okay, so you inherited them. And then when you were looking at the investment, what were some of your areas of focus in terms of them and their credit history, or the lease term, things of that nature?

Chad Kastel: You’re talking about the…

Joe Fairless: The commercial tenant.

Chad Kastel: Well, I was able to speak to the previous landlord. They had been there for seven years; excellent tenant, and didn’t move out on bad terms, and they had been at our place for five years, and spoke to the landlord that I bought the property from after we closed, and she had nothing but wonderful things to say… And I spoke to the tenant. Between those three things, we just signed a one-year lease.

Joe Fairless: Okay. And why a one-year?

Chad Kastel: That was her request. And I thought that I could be more forceful, but considering she’d been in business for so long and she said she didn’t plan to move, I didn’t really want to rock the boat with someone that’s pretty consistent, never misses rent payment, and could probably find better terms elsewhere.

Joe Fairless: Okay. What type of financing did you do on the triplex?

Chad Kastel: I bought it in cash. I actually made her two offers. She was asking 90k and I made an offer for 83k with a mortgage, or 73k in cash. We ended up meeting at 78k. I actually ended up trying to refinance, but there were some problems… This was one of the mistakes I made – I didn’t know that conventional banks didn’t wanna refinance a commercial property like that.

Joe Fairless: That’s what I was wondering about the type of financing… Okay. So what’s the latest with that?

Chad Kastel: I reached out to some close family members, and all have agreed once I get the place rented out that they would do the refinance for 5%… So it’s kind of a win/win.

Joe Fairless: What would the terms be, besides 5%?

Chad Kastel: 30-year fixed. They’re just in the position where they’re getting 2% on their money, and I’m offering them a much better option, and they’re offering me a really good option, and they know that I have experience with these things, and I wouldn’t put them in a spot where I couldn’t pay them back easily.

Joe Fairless: And what loan-to-value would you be able to get on that?

Chad Kastel: 75%.

Joe Fairless: Okay. What would the value be of the property after you have it stabilized?

Chad Kastel: We would value it at 90k. I think it was worth 90k. I think I just got a home run on my first deal.

Joe Fairless: Okay. So you’d get about 67.5k out of it, and you’d have a little bit in it, but… You’d be cash-flowing how much, after all that?

Chad Kastel: If I’m right, $9,600/year.

Joe Fairless: $9,600/year. Cool. So with your day trading as a full-time job, what aspects of day trading has allowed you to be a more savvy real estate investor as you get going?

Chad Kastel: Just feeling confident in making good bets. Jumping in on my first property – it wasn’t difficult. Once I knew the information… Between the time I picked up my first real estate and I was making offers was three weeks, and I wasn’t rushing it. I have a high risk tolerance, and I understand that, again, it’s about the process. You take all the right, positive steps, and you do that property after property after property. Of course, things are gonna go wrong, of course mistakes are gonna be made, but if your process is good, you will be net positive overall. I really enjoy that about trading; there’s nobody that tells me whether I’m good or not. The numbers are just there, or they’re not. And it’s the same thing with real estate. You can’t fake it to yourself.

Joe Fairless: Who’s managing the triplex?

Chad Kastel: I have a property manager. I ended up going on Bigger Pockets, reaching out to a bunch of people, and a bunch of different people recommended this one property manager. His name is Tom DeAngelo.

Joe Fairless: What type of fee structure does Tom have?

Chad Kastel: He’s charging me 9% of the gross rental, plus half the first month’s rent when he fills the place.

Joe Fairless: And how long ago did you close on it?

Chad Kastel: January 19th.

Joe Fairless: Okay, so three or so months ago. Any unexpected challenges over those three months?

Chad Kastel: Yes!

Joe Fairless: That was an emphatic yes…

Chad Kastel: Yes. I made several mistakes. I don’t think it’ll end up mattering, because the deal is sweet, but… It was my first project, and I was a little nervous in terms of managing it, so I was planning on selling sweat equity to a mutual friend of my business partner from Binghamton. He was a maintenance guy and owned a construction company, and wanted to get into property management, and that didn’t go well. So he was supposed to do everything, and he just disappeared. Thankfully, I had already interviewed a bunch of property managers, so I was able to seamlessly move into the other property manager without scrambling.

Joe Fairless: And when you take a look at all the lessons learned from this triplex, when you look at the next deal to purchase, what are some things you’re gonna take with you to that next purchase?

Chad Kastel: Well, look at the insurance ahead of time. I ended up losing a little bit of money on that, because it was just more expensive than I anticipated. I could have gotten quotes. And I should have looked at asset protection before I bought it.

Joe Fairless: Based on your experience as a day trader or real estate investor and a “Magic: The Gathering” player, what’s your best advice ever for real estate investors?

Chad Kastel: New?

Joe Fairless: Yeah.

Chad Kastel: We’ve heard this over again – you have to do it. There’s a million reasons not to, and there’s a million people who have told me, in every endeavor I’ve taken, the awful stories they’ve heard, from trading to traveling to real estate. You have to just learn and do it. Don’t hesitate, just engorge yourself in it.

The other thing is just take one step at a time, just do a little bit every day and you’ll learn, you’ll get confidence.

Joe Fairless: If you had to start over and you had no properties, and no money in the bank account, what would you do to build that back up?

Chad Kastel: Knowing what I know now, I think if you can find a deal, it’s very easy to get money. I would learn the trade, and then just network through meetings, through Bigger Pockets, go to the Best Ever Conference… It’s very easy. Someone can get money from me if they bring me a home run. I’m sure it’s the same for you.

Chad Kastel: Right now I’m reading your apartment syndication book. And I always think the book that you’re reading right now is your best ever book, but probably The Miracle Morning in terms of how that impacted every other step along the way.

Joe Fairless: Was that a back-handed compliment? I’m messing with you, but it was like “Every book I’m reading right now is usually the best ever, but I’m reading yours and that’s not, so I’d say The Miracle Morning.” [laughs]

Chad Kastel: Oh, no, no, no… I probably just misspoke.

Joe Fairless: I know, I’m messing with you. It was funny how you said it. What’s the worst business deal that you’ve done? You’ve done two deals in real estate, but maybe it’s a day trading thing, or something… Can you tell us about that?

Chad Kastel: Well, I’m gonna say the first house I bought, the house-hack. It’s profitable, I’m doing well with it, but I bought out of ignorance. I bought out of “Oh, I have money. I need to invest it. Real estate is good.” All I knew at that point was “Real estate is good.” We profit through Airbnb, but if we had to just straight rent it out, it would be cashflow negative, and that’s a really bad place to be, because if the stock market crashes, or there’s some major problem with the economy, vacation is the first thing to go. So I think that’s probably my worst deal.

Joe Fairless: Best ever way you like to give back to the community?

Chad Kastel: I like teaching. Regardless of what it is. I like teaching tennis. That’s my why, that’s what I’m gonna get into when I have enough passive income to retire – take on students and teach them about life on and off the court.

Joe Fairless: How can the Best Ever listeners reach you?

Chad Kastel: My phone number is 609-705-7332. My e-mail address is chadkastel@gmail.com. I’m sure it’ll be listed in the show notes.

Joe Fairless: It sure will be. Well, Chad, thank you for being on the show, talking about your first deal, and then also talking about the triplex, which is a unique second deal, in that it’s got a commercial tenant where you’ve got $800/month from them, and then you’re putting in $5,000 in renovations for the other two units, for regular residential tenants… And the challenges getting the refi, but that’s also probably the opportunity for why you were able to purchase the property, because there are some challenging components to mixed-use…

But that’s okay, because you’re solving for it, and the beauty of that is because there’s an additional challenge and it’s not by any means a challenge that torpedoes the deal, you were forced to reach out to your close family members, and you’re going to secure a loan with them, and as a result of doing that, they’re benefitting, because as you said, they’re getting 2% wherever their money is, and now they’re gonna get 5%. And then you’re benefitting, not only because you have a solution, but also it’s the long-term relationship that you’re building with them from a business standpoint. I think that’s something that gets missed a lot when people buy the traditional triplexes and duplexes, and stay with the traditional approaches. The other approach, where you buy mixed use or commercial – it’s got some other components to it, but those components forced you to grow, and then they can lead to bigger and bigger things.

I really appreciate you being on the show. Thanks for sharing your story. I hope you have a best ever day, and we’ll talk to you again soon.

Our guest today was a real estate investor first, then fell in love with marketing. Quite the opposite of the typical story we hear on the show, typically our guests fall in love with real estate investing and switch careers to real estate. Joe is still heavily involved in real estate, now he helps investors and/or agents connect with great leads through his marketing company. They go a step further for their clients, rather than being a lead provider, they are an appointment provider. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“The ROI that you will receive by investing in the marketing and sales side of your business is exponentially higher than any ROI you will ever get from anything else” – Joe Giglietti

Joe Giglietti Real Estate Background:

Host of The Billions In Real Estate Show & Founder of Exponential Referrals, a digital marketing agency

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Joe Giglietti. How are you doing, Joe?

Joe Giglietti: I’m fantastic, thank you for having me. Great to be with the Best Ever listeners.

Joe Fairless: I’m glad to hear that, and looking forward to our conversation. A little bit about Joe – he is the host of the “The Billions in Real Estate Show” and founder of Exponential Referrals, a digital marketing agency. He is working to refer up to one billion dollars in real estate this year. Based in Melbourne, Florida. You can learn more about his company at exponentialreferrals.com, which is a link in the show notes page; you can click on through to that. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Joe Giglietti: Absolutely. I’m a third-generation real estate professional. My grandfather owned a real estate brokerage back in the ’60s, my dad worked in it his whole life, and when I got into college, I caught the bug, too… And since 2003-2004 I’ve been doing real estate. However, in the last two years I fell in love with marketing, and so I decided to start a digital marketing agency to help real estate agents and real estate professionals close more deals. That’s our focus now.

Joe Fairless: So you help real estate professionals close more deals. Real quick, just a random question – you’re in Melbourne, Florida; I’m picking up a Midwest bit of an accent… Are you from the Midwest, originally?

Joe Giglietti: That is impressive! Yes, I’m originally from the Chicago area.

Joe Fairless: There we go… Alright, yeah. I think I’ve interviewed so many people I can kind of pick up on accents; I was like, “Wait a second… The way he talks doesn’t fit with Florida.” Okay, cool.

Joe Giglietti: I got smart and left all the cold weather, and went to the warm weather. [laughter]

Joe Fairless: Fair enough, fair enough. So working to refer a billion dollars in real estate this year… What does that mean, exactly?

Joe Giglietti: Okay, so as you know, in any kind of real estate endeavor, we’re not in the real estate business, we’re in the marketing business, right? So what we found was there’s a lot of people out there trying to generate leads for real estate agents, or real estate investors, or name that field of real estate that you’re doing. What we’ve found is that a lot of those leads real estate agents complain “These are garbage leads.” So what we did is we said, “Hm, how do we make leads better?”

When we look at the process – and this is true when you talk to wholesalers for example as well, or when you talk to really any business owner, they’re looking for “good quality leads.” Well, we said “What makes a lead more quality?” As we thought through that process, it is — let me just talk to real estate agents first, because that’s the core focus, right? So a real estate agent – we can get them 100-200 leads in a month, and we thought we would crush the game if we did that, and we could work on a referral basis; so we say “Look, don’t pay us until deals close.” So when we first started, we would just generate leads for them and say “Go get ’em boys, and when they close, pay us referrals.”

Joe Fairless: When you say “leads” you’re referring to the owner of —

Joe Giglietti: Name, e-mail and phone number.

Joe Fairless: Name, e-mail and phone number of a potential motivated —

Joe Giglietti: No, it’s all good. So they responded to some sort of marketing online that said “Hey, I’m either interested in buying this house, or I’m interested in selling my house, or I’m interested in having this agent help me.” The problem was we thought “Hey, we’ll crush the game.” We were 100% wrong. Our first 20 clients – we got them hundreds of leads per month, and literally none of those deals closed. That was very frustrating…

Joe Fairless: Huh…! Yeah, you did the work…

Joe Giglietti: We did the work, right? And it didn’t happen. So the question becomes “Why? Why don’t these leads close?” So we went and did it ourselves, spent some money in Denver, Colorado, where we’re not, to test it in a market we weren’t in, to see if it would work. We spent $600 in ads, 60-90 days, we’d look out to see how much money is coming into the pipeline, and the answer was $60,000 in gross commission income for an agent there. And we were like, “We spent $600, we’re getting $60,000 back (not us, the agent). That’s 100 times ads spent. It’s not the leads, it’s how the leads are being followed up on.” So it took us the next year of breaking down the process – and this is true no matter what area of real estate you’re in – to realize that most people focus on buying leads, and then they check all these different “lead sources” like Facebook leads, Google leads, direct mail leads, [unintelligible [00:05:56].12] whatever, in order to say which leads are better, when the reality is all of those leads are the same thing. Somebody who’s raised their hand to identify themselves.

The next thing that always needs to happen is a conversation with those leads, which was the first frustration – most people never follow up with the leads. They may call them once and leave a voice mail, and that’s it. If they don’t call back, it was a junk lead. Well, what we’ve found is that if we could find other communication channels in order to turn leads into conversations, and then turn those conversations into appointments, so that real estate agents only have to talk with people who are ready to buy or are ready to sell right now, real estate agents have a much, much higher likelihood — as a matter of fact, the National Association of Realtors says 70% of people work with the first real estate agent they meet face to face… So our whole goal is to change from being simply a lead provider to being an appointment provider; and by providing appointments, a much higher percentage of deals close, so it’s a better deal for the agents, it’s a better deal for everyone.

Now, I know all of your Best Ever listeners aren’t real estate agents, but it bears out an important point, that “Huh, the industry is missing a little bit”, which is everybody’s like “I’ve got a lead.” Maybe it’s a wholesaler who’s looking to buy a house, and they get a lead, and they call it once and then nothing happens. The game is not leads. That passed five years ago; with Facebook and everything else it’s so easy to get leads… The game is appointments – how many appointments are you getting every single month to talk with, for example, motivated sellers? Or, I’ve heard — by the way, great content on your podcast… I saw some of your capital raising podcasts – they’re so good. It’s the same game – it’s not leads of people that we can talk to about raising money, it’s actual appointments to sit down with investors who are looking and purchasing, for example, apartment deals, or commercial deals. Same game. It doesn’t matter if it’s a real estate agent, it’s a wholesaler, it’s an apartment owner – it doesn’t matter; we’re all playing the same game, which is appointments. It’s either appointments to get motivated sellers, appointments to get good deals, or it’s appointments to raise capital. That’s the game. So that’s what we’ve worked on perfecting for the last two years.

Now in the state of Florida what we’re doing is we’re building out a competitor to Zillow and Realtor.com for agents, that provides agents with appointments, and they only have to pay us when the deals close.

Joe Fairless: That’s such a smart business plan, and it’s such an interesting insight too, to hear you talk about “It’s not the leads, but rather it’s the appointments, because that leads to conversions and actual transactions taking place.”

Joe Giglietti: Yeah.

Joe Fairless: You said you’ve been working on it for the last couple of years to hone that process of actually getting the appointments scheduled on a consistent basis… Tell us about the process that you’ve been working on.

Joe Giglietti: Most people could survive just off of Facebook. There’s a lot of great channels; everybody’s talking about Facebook, and the reality is it’s really inexpensive. For example, if you’re looking for someone to buy houses – I know this is gonna be a shock, Joe; you’re probably gonna think I’m a genius when I say this, but the best way to get people who are interested in buying a house to become a lead is to advertise a house. [laughs]

Joe Fairless: Yeah, imagine that.

Joe Giglietti: Imagine that. There’s all these marketers out there, it’s like they’re the “catch me out” because they’ve figured this thing out, and it’s like, they advertise a house. [laughs] If somebody is interested in that house, it’s like “Yeah, I’d like to see pictures and more information” and so they put in their name, e-mail and phone number, right?

Joe Fairless: Yeah.

Joe Giglietti: So that’s a lead. It’s the same thing Zillow does, or Realtor.com. There’s not secret – they advertise houses, people say “I want more info that”, and they give you info. That’s a lead. There’s no magic. Here’s the thing though – what happens after that? For us, what we’ve found is that if we give it to the agents and we say “Hey, call them back.” I love all my real estate agents, I’m a real estate agents, but I started in the investing work; I didn’t get my real estate agent license [unintelligible [00:09:42].20] So I love everybody, but the reality is most investors that I know kind of complain about the agents not returning phone calls as well; it’s a pretty common theme in the industry. So if you’re gonna base a business around that, it’s probably not a good business.

So we had to figure out, okay, obviously when somebody becomes a lead, we should call them back, and we should call them back quickly. Great. Same thing if you’re finding a motivated seller, or even if somebody who’s interested in potentially lending money on a deal – you should call them back quickly. I don’t know, it’s a dopamine drop to them immediately, right?

Joe Fairless: Yup.

Joe Giglietti: But if we’d just depend on business owners doing that, our business would fail. We figured out six other channels that we can do, that we can initiate conversations in with the buyer or seller of real estate, or with the real estate agent who’s interested in our service, or with an investor when we’re looking to raise money – six other channels that we could have conversations in.

Let’s say somebody’s on Facebook and they decide “Yeah, I’m interested in this house”, or if you’re advertising an event to teach people how to invest in apartment deals because you’re looking for investors, and somebody clicks on it – first thing that should happen is a call, but the next thing that happens is we actually have an automated text process that texts them. Now, that doesn’t sound crazy, but here’s what we do that’s a little different – we text our leads three times a day for five days, or until they answer.

Joe Fairless: That’s a lot.

Joe Giglietti: Most people are like, “That’s a lot”, right? That was my thought. Remember, we spent hundreds of thousands of dollars on ads to figure this out.

Joe Fairless: I’d be blocking you so quickly…

Joe Giglietti: You would think, you would think.

Joe Fairless: Well, I know I would.

Joe Giglietti: Well, you’d probably just respond.

Joe Fairless: No, I wouldn’t respond. Well, okay, so in this scenario I initiated the conversation…

Joe Giglietti: Yes, that’s the thing.

Joe Fairless: Okay, so I initiated it.

Joe Giglietti: Yup. So I text you back, you don’t respond because you’re busy. Now, these are high-value texts…

Joe Fairless: What do they say?

Joe Giglietti: Well, it depends on the thing, but for real estate, the first one is “Hey, are you looking to buy soon, or are you just browsing?” And we specifically set it up that way to make it easy for them to respond. They want out of the conversation a lot of times, so they’ll say “Browsing.” Well, now we’re talking.

Joe Fairless: [laughs]

Joe Giglietti: It’s almost like when you go into a retail store. If they say “Hey, can I help you?” “No, I’m just browsing.” You wanna say that, so you can get them out of your face, but a good salesperson – they’ll look at what you’re browsing and, for example, find something else in the store that’s comparable to that, that they think you might like, and they say “I saw you were looking at these, and I think these shoes would go fantastic with it. Do you like these?” At that point, it’s almost rude for the person not to respond back, because you added value, you tried to provide value to them. You might be like, “Oh yeah, I like those” or “No I don’t really like those.” “Oh, okay. Are you looking for shoes…?” and you’re in conversation. That’s the next step of all of your appointments – you need a lead, and then you need conversation. Text is one way to do that.

Here’s the funny thing – sure, some people say “Stop”, but most of the people who respond, they say “Thanks so much for staying on top of this. I’m sorry, I’ve been busy. It’s my fault”, and they just enter the conversation. They appreciate the professionalism of somebody who consistently stays with them, if they’ve requested information. That was a shock to us.

Joe Fairless: Yeah. So you said six other channels – is texting one of those channels?

Joe Giglietti: Yeah. Call, texting, e-mail… E-mail is an obvious one, right? Now, next one, most people don’t even think of this – marketers. Marketers tend to do upsell offers. If you go to buy knives on a website, the next one will be like “Hey, get two for the price of one. But wait, there’s more…”, right?

Joe Fairless: Right.

Joe Giglietti: They’re calling you the next day and they’re trying to upsell you, right? Most real estate agents and marketers and people of that nature don’t do that. Well, it’s a phenomenal business strategy. Is there a way to work that when you’re generating leads? The answer is yes. So on the next page usually they have a video or pictures of the property, with a specific offer. To give an example to people who are doing an event and they’re gonna raise money at the event – one of the things they could do on that page is talk about some special, unique deals that have actually come up recently, and if you want more information on this, click this button and schedule an appointment to talk with us directly. Boom, it’s an upsell offer, right?

Joe Fairless: Right.

Joe Giglietti: A small percentage of people take it, but it doesn’t matter; if you get 100 people on that page and 3-5 schedule appointments, most people can close some deals with 3-5 investors who are coming in. So that’s way number four.

Way number five is on every page that we’re sending people to is chat. Just like you see on e-commerce stores, and stuff like that. Surprisingly, people will go to the pages and they’ll have questions. For us, it’s questions about houses. “Oh is this sink bronze or stainless steel? How deep is the sink? Is it laminate floor or hardwood floor?”, whatever it is. Instead of calling a real estate who they don’t wanna talk to, they go on the chat and they start typing in their questions there, because it’s non-committal, right?

Joe Fairless: Right…

Joe Giglietti: Guess what – we’ve just turned a lead into a conversation, and then we turn those conversations into scheduled appointments with the agents.

The last two are search sites. We have search sites that we send them to, where they literally click buttons if they have questions with the agent; another place where we can follow up. And we keep staying in front of that customer. Anybody who becomes a lead, they’re retargeted on Facebook again and again and again; every single week they’re seeing the same agent, new properties, getting sent back into that search site, so that if they click again, now we can start the text sequence again, now we can show them more properties etc. and we track everything they’re doing.

And then lastly, Facebook messenger is huge. So many of these people, they become a lead, and then for the next five days we’ll send them a video every day, and underneath the video is a messenger button, so that they can talk specifically with the agent. They’ll click the button to ask a question, and conversations become appointments.

So we have call, text, e-mail, online chat, upsell offers, search pages and Facebook messenger, and you could also add in voicemail drops if you wanted to add number eight. Most of those you can set up on automation, so that you’re only actually talking to the person once they’ve responded. That’s what’s changed the game for us. Even if they don’t call, we’re catching them six other ways.

Joe Fairless: I’ve gotten in all caps, “Turn a lead into a conversation.” That’s the key insight here, and then your business is focused on taking that lead and starting that conversation, because then that goes to the appointment, which exponentially – to use your word – increases…

Joe Giglietti: Oh, yeah! Best listeners ever, you heard him! [laughs]

Joe Fairless: There you go… Increases the likelihood to convert into a sale. How do you make money?

Joe Fairless: Cool. Got it. Taking a giant step back and sticking with the format of the show, but tying into our conversation and your background, what is your best real estate investing advice ever?

Joe Giglietti: I think a lot of people have heard this one before, but misunderstood it… So forgive me if I’m repeating it, but here’s the best real estate investing advice I’ve ever received – you’re in the math business. Most investors assume by “the math business” is the operation side. Every business has two sides – you’ve got marketing and sales, and then you have operations. Most people, especially in real estate – if we were a pie maker, we’d be thinking about the pie; well, we’re in real estate, so we think about the apartment deals – what are the numbers? What’s the value-add opportunities? When you think about a flip, what are the costs? What percentage are we buying it on? All that kind of stuff… And we think about the operations side of the math, because we’re taught that, many times, if you have a good deal, the buyers will come, and that’s kind of the whole focus.

But the reality is the way to really explode a real estate investing business, or a real estate agency business, is to focus on the marketing and sales side. Sales is what actually makes money in the business; the operations – yes, they need to be good, they need to be quality, location obviously is important, and all that kind of stuff, but if you focus on the marketing and sales side and you look at the math on that side of the business, it’s very interesting, because the ROI that you will receive by investing into the marketing and sales side of your business is exponentially higher than any return on investment you will ever get from anything else.

Now, I’m not suggesting that you should only do that, but the point is, for example – I’ll take a real estate agent and then I’ll give an investor example. If you’re a real estate agent, and let’s say it costs you $500 (and that’s a lot; it doesn’t cost $500) every time you get an appointment with somebody looking to buy a million dollar house – now, that real estate agent is gonna make $25,000 when they sell that house to that buyer. So if they spend $500 every time and they had to have five appointments, which would be a terrible closing rate; it should be like 50%-75%. But let’s say it took them five appointments in order to lock somebody in at a million dollar buying price point – that means they’ve spent $2,500 in getting appointments, to get $25,000 in revenue.

Joe Fairless: Right.

Joe Giglietti: That’s a 10x return on your investment in 60 days.

Joe Fairless: Yes, please.

Joe Giglietti: Yes, exactly. Let’s take it to the real estate investing side – so many guys are like “I just wanna get to the next level.” And they’re hunting down deals, and they’re doing their stuff, and they’re hustling to find a deal, and driving for dollars, and all the different things that all of us real estate investors do, but the reality is if you understood the math side of the business… Investors are afraid to invest into the highest ROIs because even though they know how to do the math, they really can’t see the bigger equation, which is this… Let’s take apartment investors; maybe there’s guys out there that are just doing 4-units, and they really wish they were doing 100-units. What’s the difference between the guy doing 4-units and the guy doing 100-units? Well, one is knowledge, and the second one is access to capital. Well, how do you get access to capital? Surely an appointment game.

I remember Elon Musk, the first time I heard him say this it crushed my mind. Somebody asked him, “How do you raise the money to do all these billion dollar deals?” He literally waved his hand and he said “Raising money is merely a function of how many phone calls you’re willing to make.” [laughter] Like, “What IS the question”, right?

Joe Fairless: Yeah, like “D’oh…!”, right?

Joe Giglietti: Yeah. “This annoys me”, right? But that’s the point… In today’s world, using social media, using direct mail, whatever channel you wanna use for marketing, you figure out how much it costs you to acquire an appointment with an investor, and let’s say investors who are willing to invest a minimum of $100,000. I mean, you need ten investors to get a million dollars in capital, and that’s a great down payment on something.

So that’s the whole idea… The thing that’s distancing you from whatever your dreams are really comes down to how many appointments you are scheduling. And that comes down to maths, which is “How much does it cost me to get an appointment?” And the mistake real estate investors and real estate agents make is they’re like “Well, I wanna optimize.” “How much do you wanna spend for an appointment, sir?” “Oh, could I get them for $20, please?” And it’s like, “Why?” Why does it have to be $20? Not $500, but what if it was $500, and you’re a real estate investor, and every time you spend $500 you have somebody who’s willing or potentially open to the idea of investing $100,000 into your next deal. How much would you spend on appointments in order to get a million dollars in capital? How much would a million dollars in capital change your life? It’s purely a math question; you’re simply not doing the math or not focusing the math in the right area.

Joe Fairless: I love the way you think. It’s my opinion that you’re so on point with this, and thanks for bringing on the Elon Musk quote; I hadn’t heard that before. And also, we get so caught up in the cost of something, and the only reason why we should ever be caught up in the cost of something is if we’ve done the analysis of it not being a good return on investment when you factor in the potential opportunity of actually converting that… So then it’s just, like you said, doing the math, and figuring out “Okay, so it’s $300 to get an appointment? That sounds maybe on the surface expensive, but how much do I actually make whenever I convert this person?”

So on the back-end you’ve gotta make sure that you’ve got the deal flow to accommodate the leads, that way you can put them into a deal, but assuming you’ve got the deal flow to accommodate the leads, then it’s just a simple math equation, like you said. I love this.

We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Giglietti: Can I say one other thing from what you’ve just said?

Joe Fairless: Yeah, yeah.

Joe Giglietti: I would just like to say this – one of the things marketers are saying… I know a lot of investors don’t hear this, because you’re not necessarily marketing like me, and in that world, but one of the things we all know to be true is whoever can spend the most money to acquire a customer, wins.

Joe Fairless: Yeah…

Joe Giglietti: That sounds backwards, but it’s so true. And here’s the reality – compared to 95% of the businesses out there, real estate agents and real estate investors can spend far more than the average person to acquire customers. Think about an apartment deal – how much can you spend to acquire more capital? How much do you really make on that, even within 60 days, even from just closing the deal and the initial fees if you’re syndicating that you’re making from that… You can spend way more. Think about a hamburger place – how much can they spend to acquire a customer? For the average business, where it’s normally $10, $20, $50, $100 to acquire a customer, it’s getting tight, right? Your margins are almost never tight in real estate. You’re just afraid because you don’t know how to get the appointments and you haven’t done the math… So I’m begging you, because it will help everyone of you so much, figure out the appointments. It’s not going to cost too much in 99% of the cases.

Joe Fairless: Right. And I will mention one thing, then we’ve gotta quickly do the Lightning Round… On what you said, “Whoever can spend the most money to acquire a customer wins” – and that’s assuming that you know what the lifetime value of a customer is for your business, otherwise you’re just shooting in the dark… But I live and breathe that statement with my apartment syndication book. My apartment syndication book is $50. On Amazon it’s the most expensive book that I know of, other than a textbook in real estate investing; but I would certainly argue that my book is more valuable that any textbook I’ve read, which I haven’t read too many though… And because it is priced at $50, which anyone who’s read it – at least I would imagine – most people who have read it would say it’s well worth the investment of $50… But that’s not my point here.

My point here though is because it is $50, I can afford to have my Amazon ads be at a higher price, because I’m getting more profit on the book than any of my competitors that I’m competing against for those eyeballs. So my Amazon ads – I rank number one on multifamily investing, apartment syndication, multifamily syndication… And the reason why I’m able to rank number one, one is through organic growth from the book, but then two, I have the sponsored ads in the best placements, which helps the growth, because mine is the most expensive book, therefore I can have a higher price on my Amazon ads, more than anyone else… Because if someone else were to match the price that I have on my Amazon ads, they’re not gonna be making any money from the book.

Joe Giglietti: Yup, that’s genius. And the lifetime value of those customers is far more than the $50 for the book, because many of them wanna come to your events, and all the other great, great things that you provide.

Joe Fairless: Of course, yeah. We’re gonna do the Lightning Round. We’ve got like 60 seconds to do the Lightning Round. Are you ready for the Best Ever Lightning Round?

Joe Giglietti: I flipped a 60-unit apartment deal and on the front side we got $235,000, without any cash of my own invested.

Joe Fairless: Well, why are you in the referral business if you can do that?

Joe Giglietti: The referral business could be a billion dollar business, so…

Joe Fairless: There we go. What’s a mistake you’ve made on a transaction?

Joe Giglietti: I had an apartment deal in St. Louis, Missouri once, and we allowed all of the tenants to be funded by a city grant program that they had. It was a little bit higher rents, which seemed fantastic, but then we didn’t realize that the city could pull it at any time, so the city actually pulled that program and that funding instantly, overnight, and all of our tenants were incapable of paying. We lost every tenant, and that apartment complex was terrible.

Joe Fairless: Dang! How did you end up financially?

Joe Giglietti: We lost that deal.

Joe Fairless: To the bank/lender?

Joe Giglietti: Yeah, we lost that to the lender. Terrible.

Joe Fairless: Best ever way you like to give back?

Joe Giglietti: My wife and I – that’s our dream and our focus, so everything that we’re doing from here, we’re working to fund orphanages in Africa.

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Joe Giglietti: You can e-mail me if you have any questions – joe@exponentialreferrals.com. Or you can just search me on Facebook at Exponential Referrals.

Joe Fairless: Well, thank you so much for being on the show. I have a marketing background, so I think I’m just naturally inclined to enjoying these conversations, but… There’s a whole lot of value in this for anyone, regardless of their background. Turning a lead into a conversation. It’s not about the leads, it’s about the conversations, which lead to appointments, which lead to conversions… But you’ve got to know your lifetime value of a customer in order to intelligently go about this process, so that you know how much you can invest for these appointments.

Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Gerri has been involved in consumer credit education for many years, even writing a book on it. Gerri was hearing from real estate investors that people were getting scammed trying to get credit for their real estate business. She’s here today to explain how we can get credit for our businesses and how to spot a scam. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“I’m not aware of any major credit card issuer that issues a business credit card without a personal guarantee behind it” – Gerri Detweiler

Gerri Detweiler Real Estate Background:

Education director for Nav.com, the first site to give business owners free person and business credit scores

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Gerri Detweiler. How are you doing, Gerri?

Gerri Detweiler: I’m doing well, Joe. Thank you.

Joe Fairless: I’m glad to hear that, and nice to have you on the show. A little bit about Gerri – she’s the education director for nav.com, which is the first site to give business owners free person and business credit scores. She’s got 20 years of experience in the credit industry. Based in Sarasota, Florida.

Best Ever listeners, I hope by the way you’re having a best ever weekend. Because today is Sunday, we have a special segment for you called Skillset Sunday, where our guest teaches you a certain skill. Maybe you’ve got the skill; well, if so, then you can hone it based on our conversation. The skill today we’re going to be talking about is finding business credit; finding money for your business via business credit. This certainly is applicable to us as real estate investors, especially as we’re starting out, or looking to grow. If we have time, which I think we will, she’s also gonna talk to us about the scams that are out there to watch out for.

With that being said, Gerri, do you wanna just give us a little bit about your background, and then we’ll roll right into it?

Gerri Detweiler: Sure. I’ve been involved in consumer credit education for a long, long time. I wrote the first mass-market book that talked about FICO scores, and worked on the legislation that gave us free consumer credit reports. So I’ve been involved in this for many years, and a few years ago I met Garrett Sutton. He’s an attorney who has a lot of real estate clients, and he told me that a lot of his clients were struggling or sometimes getting ripped off trying to build business credit for their real estate investing. So we started looking into it together and decided to write a book together; that was my latest book, “Finance Your Own Business.”

In the course of researching that I interviewed the CEO of Nav, Levi King. I loved what they were doing. The easiest way to describe it is it’s like Credit Karma, but for small business. It shows you your business and personal credit scores. I loved it so much that I ended up joining the company full-time. So I’ve been focused primarily on educating small business owners about credit for the past three years, but of course, I have all those years of personal credit knowledge in my head, too… So I like to try to help business owners look at it holistically and help them understand how to make sure both personal and business credit are strong, so they can open up more funding opportunities.

Joe Fairless: And I believe the business model for credit karma is that it’s free, or a low fee if it’s not free, and then they make the real money based on having partnerships with different credit options, like different credit cards and things like that that they recommend to their customers. Is that a similar business model for Nav.com?

Gerri Detweiler: Yes, exactly. When you come to Nav, most of our customers come as a free customer; they see their free business and personal credit. But then with that information we’re able to present to them different financing offers. We have a marketplace, we work with over 30 different lenders of different types around the country; we try to be very agnostic in terms of showing the business owner what’s best for them, not what’s gonna earn someone a commission so they can go to Hawaii, or something… So we try to be very business-friendly in showing those offers, and we don’t sell that information for marketing purposes to lenders, so you won’t get all kinds of phone calls from lenders if you sign up for Nav.

Joe Fairless: So how should we approach our conversation today, in terms of helping the Best Ever listeners who are real estate investors find money for their business via getting business credit?

Gerri Detweiler: One of the things I do when I’m at home in Florida is I usually speak about once a year with our local real estate investors group. Over the years I’ve talked about personal credit, and then we’ve graduated to business credit, and I find that with real estate investors, at least the ones that I’m speaking with, there’s a lot of overlap. There’s a lot of situations where they will turn to personal credit to get some money to accomplish a goal.

Let’s say they’re fixing up a property to flip, and they need to spend money on supplies, and paint, and everything else… So they max out their personal cards, and then when they sell the property they pay it off. I think business credit provides another tool that can help the business owner protect their personal credit, which is important still. Any business owner – real estate investor, anybody; you still wanna protect your personal credit, because there may be times where a good personal credit score could be leveraged for a particular opportunity, so you wanna protect it as much as possible.

So what I tell the small business owner is there are opportunities to get financing in the name of your business, that can stay off your personal credit, so you aren’t affecting your personal credit scores. Many times these financing opportunities have attractive costs, so they aren’t super-expensive, but to get to the point where you’re relying more heavily on business credit than on personal credit, you need to build business credit.

I listened to the interview you just had about raising funds, with Lee Arnold, and I thought this was such a good comparison. That’s a must-listen, by the way… I thought it was such a good comparison what he was talking about, where he was saying “You need to start by doing some deals where you can get some cash, and then that cash attracts other investors, because they wanna see that it’s low risk, that you’re successful.” The same thing is true with business credit. You build business credit, so that you have this reputation for your business. That in turn opens up additional financing opportunities for your business. Does that make sense?

Joe Fairless: It does. So then the question is “How do we build that business credit?”

Gerri Detweiler: Well, the great thing is that it’s much easier to build business credit than some people lead you to believe… And the reason is most business owners are not paying attention to it. We’ve done surveys and 72% of small business owners don’t even know these credit scores exist, and one of the reasons they don’t know is because there’s no federal requirement that anyone give you a free business credit report, there’s no requirement that they tell you if they turn you down based on your business credit… Anyone can check your business credit. It could be a competitor, a future business partner, a lender – anyone who wants to pay for the report can get it.

Joe Fairless: Is it a credit score like your personal score?

Gerri Detweiler: There is a credit score. The commercial credit bureaus – let’s start with who they are. They’re Dun & Bradstreet, Equifax and Experian. There are some others, but those are the three big players, and the commercial databases are completely separate from personal credit. So if you have personal credit with Experian, that’s completely separate from the commercial credit that your business has with Experian.

And then they produce their own score. D&B, one of the most popular scores, is PAYDEX. With Experian it’s Intelliscore. Equifax has a variety of scores, and they run on different ranges. If you pulled your personal credit score and you had an 80 — well, you couldn’t even go that low with most FICO scores, right? With 80 at the PAYDEX score, or Experian’s Intelliscore, that would be good. Those are strong scores. They run on a different scale.

Joe Fairless: What is this scale usually?

Gerri Detweiler: It’s usually 0 to 100.

Joe Fairless: Okay.

Gerri Detweiler: But again, there are scores that can go up to 1,000 and more.

Joe Fairless: Alright, fair enough.

Gerri Detweiler: So always look at the range. When you’re checking your business credit, look at the range and see where you fall on the range. We show red, green, yellow to help you understand where you fall, and whether your score is strong. But always look at that range and see where you fall.

Joe Fairless: Okay.

Gerri Detweiler: Then the process of building business credit is basically to have accounts to report, because you can’t have a credit score, whether it’s personal or business — you can’t have a credit score unless there are accounts that are showing up. That’s how the credit scoring model works – they analyze the data of how you handled those in the past, in order to predict how you’re gonna pay in the future. But the tricky thing with business credit is that not all companies report, and it’s not consistent across all three.

With personal credit, you get a mortgage, it’s gonna probably show up in all three of the major credit reports. It’s not typically the case with business credit. So you have to be a little more scrappy… But once you establish these accounts, even if you have just a few accounts reporting, you’re already ahead of most business owners who aren’t even doing anything to build business credit. So it can be a pretty easy process to get started, and I’ll give a resource if you don’t mind, real quick, I’d like to share… If you go to nav.com/vendors, you’ll see an article I’ve written there; it has three vendors on there – Uline, Grainger and Quill.

They’re all super-easy to get accounts, but they don’t check personal credit, they don’t report to personal credit, so your personal credit is not an issue… You can buy things that you need for your business; it could be janitorial supplies… And their catalogs are huge. It could even be [unintelligible [00:10:53].24] for your coffee machine; whatever it is that you wanna buy – you buy those things on terms. Usually they start out with a small credit line, Net-30. Just pay those on time, and very quickly you can find yourself building credit with them, and those report, and then that in turn makes it easier to get other types of business credit that you might want to use in your business, whether that’s a fuel card, or a Home Depot commercial account, or something else that you can use. So you’re trying to take as many of those purchases as possible and keep them off your personal credit and solely in the name of your business.

Joe Fairless: Two follow-up questions. One, that doesn’t mean that you have to pay interest on it, as long as you pay those bills on time, correct?

Gerri Detweiler: Correct. They’ll give you Net-30 terms, and they’re not gonna charge interests for you to pay in 30 days. There are some vendors where if you have terms with them, you give up a discount. Say there’s a 2% discount if you pay in ten days. If you take the Net-30 terms, you don’t get the discount. So in effect there’s a little bit higher costs with some of those…

And of course, if you get into a business credit card, there’s gonna be interest if you carry a balance, but if you pay it in full you can avoid interest.

Joe Fairless: And when you pay it on time, that is you are getting points or credit for doing that, and you’re accomplishing the objective of having accounts show up that you have, and you’re building your credit, correct?

Gerri Detweiler: Exactly. So with consumer credit it feels a little overwhelming sometimes when you look at all the factors that go into a consumer credit score. With a business credit score it’s usually much simpler – payment history. That is the thing that they are most interested in – your payment history. Are you paying on time or not. So having a few accounts that you pay on time can be very valuable and build your credit quite quickly if you’re proactive about it.

The other thing that I recommend that relates to that is that if you’re gonna use credit cards in your business, and at least to the real estate investors group that I speak with this is a very common scenario; I’ve heard some really strange things in that regard, so I wanna clarify it – the best thing you can do is to get a business credit card that stays off your personal credit. I’ve also written an article with that list, we can put it in the show notes. It’s nav.com/report. It lists all the major issuers… And the business credit then will not report to your personal credit unless you default. As long as you pay it on time, you’re fine.

So if you need to run up a high balance while you’re trying to pay for this rehab, and then you’re gonna pay it off and you refinance, or you sell the property, it’s not gonna bring down your personal credit score. So that’s an advantage of that.

Those cards are pretty easy to get as soon as you start your business. You don’t have to have a business for one or two or three years. But they do check the owner’s personal credit, and there is a personal guarantee. So it is a way to build credit, it is a way to keep those activities off your personal credit, but I’m not aware of any major credit card issuer that issues a business credit card that does not have a personal guarantee behind it. So if you do, if the business does fail, you would be on the hook personally for that debt.

Joe Fairless: And the other question I had was with vendors that you are currently working with – “you” meaning the Best Ever listeners are currently working with – is there a way for them to check if they are getting credit for that line of credit that they’re paying off or they’re working with that vendor?

Gerri Detweiler: Yes. So the question is are they reporting or aren’t they. You can go to Nav, get a free account, we’ll give you a coupon code for a premium account too for free for a month, and you can see who’s reporting. Now, the one thing I have to warn about business credit that’s different to personal credit is the credit reports – and this is industry-wide – they do not list the name of the lender or the vendor. They categorize them. So it’ll be manufacturing–

Joe Fairless: Why?

Gerri Detweiler: They say the reason they don’t do it is because the creditors are worried that then other businesses would come in and poach it by just pulling the credit reports and seeing who has accounts.

Gerri Detweiler: Well, I get it, but my theory is the reason they don’t is because they don’t have to; in the consumer world you get your credit report by law; they have to explain that you have a mortgage with Bank of America. They don’t have to on business credit; there’s no regulation, so I think that’s why they get away with it.

So you have to be a little bit of a detective to figure out “Okay, yeah, I know I have a $1,200 balance with that card, so that’s probably that account.” I just wanna warn people upfront, because that’s a little confusing… But you can check them for free at Nav, and we also provide a letter; if you want to reach out to your supplier or vendor and ask them to report, we have a description that helps them understand how to do that. Some will, some won’t, but we say not asking is an automatic no, so you can always ask and see whether they will report… But often what I’m telling business owners is to go ahead and work with companies that already do report.

Joe Fairless: Got it. So someone with a newly formed entity – they can get a credit card, and you mentioned the link for different credit cards that use your personal credit as a default only if you default on it, but otherwise a new entity can have a business credit card… And then you gave three vendors on that website for us to go to and use if we want to build our credit that way. Anything else as it relates to building our business credit that you think we should talk about?

Gerri Detweiler: Yeah, the other thing that’s important to understand is how payment history works on business credit, because it’s more granular than it is with personal credit. With personal credit you forgot to pay the credit card bill; you go in a couple days later, you pay it… You’ll get stuck with a late fee, but it’s not gonna show up on your personal credit as late until you’re 30 days late, in most cases.

With business credit they use something called DBT (days beyond term). If your terms with that vendor are Net-30 and you pay on day 32, you’re two DBT. If your terms are net-60 and you pay on day 62, you’re still two DBT. So it’s much more granular with business credit… So what I encourage business owners – especially business owners, because you’re so busy, right? – is to make sure that you set up systems (reminders, alerts) so you don’t forget to pay that bill.

And then the other thing you can do is for those suppliers that you do have terms with, as you build business credit you can go back and negotiate better and longer terms. So if you’re Net-30 now, that doesn’t mean you can’t be net-60, net-90, even net-120 days in the future. And the stronger your business credit, the more likely they are to extend longer terms to you, and that in turn improves your cashflow.

Joe Fairless: Let’s talk about scams. Scams are fun to talk about, but not fun to participate in, so let’s attempt to help the Best Ever listeners avoid participating in them and just talking about them. What have you seen out there?

Gerri Detweiler: Well, a few things. First of all, on the personal credit side, credit repair – it’s not always a scam; I’m not opposed to credit repair, but I think sometimes people think that there’s some secret sauce that if they are willing to pay enough money, they can get anything off their credit, and that’s just not true. It’s basically a process of disputing information and hoping that it comes off; if not, then you dispute it again, and hope it comes off in the future.

On the business credit side, people will spend a lot of money trying to learn how to build business credit, and I would encourage them to start with the things that they can do for free, because that $5,000 or $8,000 might be better spent improving that property, going on to your next deal… So there’s a lot you can do on your own, as a business owner, to get started building business credit. And it’s just a process that you have to initiate. And like any type of credit, you do it before you need it… Because all types of credit are based on a payment history over time. So you start early, before you need it, so that you have that payment history there when you do need it.

The other thing I’ve seen – this happened to one of Garrett’s real estate investing clients, where he spent a lot of money on a shelf corporation, with the promise it would come with a million dollars in credit lines, and it did not, and he basically lost that money. It just didn’t materialize. I’m not saying there’s never a place for a shelf corporation…

Joe Fairless: What is a shelf corporation?

Gerri Detweiler: It’s a corporation that’s been formed in the past; someone formed the corporation, and then essentially put it on the shelf. So it has a longer history as a business.

Joe Fairless: Oh… I’d never heard of that.

Gerri Detweiler: Yeah… The sales pitch is this comes with all these credit lines, because it’s an established business. And time in business is helpful; it’s helpful for many types of financing. But sometimes you spend a lot of money on something that’s not gonna deliver the promise that you would hope, so I would be very leery about some of the promises you’ll get X amount of business credit if you spend X amount of money. Again, it’s a process, and it’s something you can do largely on your own by just taking a few minutes literally every week to establish these accounts and then make sure that they’re paid on time.

Then once you do, the ultimate goal is to have access to more lines of credit for your business that you can use, that aren’t associated with your personal credit, some of them with a personal guarantee and some of them not with a personal guarantee. So that’s the eventual goal, and it is very feasible. It’s just a process that takes time.

Joe Fairless: The concrete next steps that I believe you mentioned to build that credit is 1) work with a vendor that is reporting your transactions to one of the three organizations (Dun & Bradstreet, Equifax and Experian), and then 2) get a business credit card immediately, and use that. Make sure you’re paying it off on time, so we’re not being charged interest. Those are the two concrete ways to do that. Anything else other than those two things that you think the Best Ever listeners should do?

Gerri Detweiler: Yes, and the third thing I hear from real estate investors in particular – because many of them have multiple entities, to hold different properties; so they’ll ask me “Well, which entity should I use to build business credit?” And typically, the best strategy for a real estate investor is an entity that is focused on marketing and management, rather than strictly an entity that is formed to hold a property… Because real estate can get flagged as higher risk by some, and I don’t want anyone to not be truthful here, but if you have a property management or a marketing company and that’s your entity, then I would focus on building business credit with that entity, and then that could spill over and be helpful to your other entities… But that’s the one I would focus on.

Joe Fairless: Very helpful tip, thank you for that last point. How can the Best Ever listeners learn more about what you’ve got going on and your business?

Gerri Detweiler: They can check out a free Nav account at nav.com/freeaccount, and when they sign up there, they can use the code “podcast” and they will get a free month of our premium accounts; that will give them full detailed reports from all three of those credit bureaus.

Joe Fairless: Excellent. Well, very informational… Thank you so much, Gerri, for being on the show. I was summarizing it along the way; usually I summarize at the end, but I just wanted to make sure I was accurately reflecting what you were saying, so… We’re good to go, my friend.

I enjoyed our conversation. I hope you have a best ever weekend, and we’ll talk to you soon.

How to Build Your All-Star Apartment Syndication Team

We’ve worked through finding the best markets for real estate investing, as well as other aspects that lead up to completing your first apartment syndication deal. Today, Theo is covering the first part of building a great syndication team. In this particular part of the four-part series, we’ll hear about the four core team members, who they are, and how to find them. He’ll also cover the question, “Do you need a partner and a mentor?”. If you enjoyed today’s episode, please subscribe in iTunes and leave us a review!

During a number of successful deals, my clients and I have worked with Marc Belsky from Eastern Union Funding and Arbor Realty Trust for debt, equity, and more. It’s possible that he could help you too.

TRANSCRIPTION

Start Reaching Out to Potential Syndication Team Members

Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process but how to actually do each of the things, and go into it in detail… And we thought, “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to apartmentsyndication.com, or to learn more about the apartment syndication school, go to syndicationschool.com, so you can listen to all the previous episodes.

Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series – a free resource focused on the how-tos of apartment syndication. As always, I am your host, Theo Hicks.

Each week, we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we will offer a document, spreadsheet, or some sort of resource for you to download for free. All of these free documents and the Syndication School series, past and future, can be found at SyndicationSchool.com.

This week is the start of our second four-part series. This will be part one, and the series is entitled “How to Build Your All-Star Apartment Syndication Team.” As the name implies, we are going to be talking about building your team. If you have followed the previous eight series, essentially we’ve built to the point where you are now ready to start actually reaching out to various team members in order to bring them on and are one step closer to actually looking for deals. So you’ve got your education and experience on lock, your goals are set, market selected… Next step is to start building your team.

In this episode, we are going to go over what the core and the secondary team members are, and then we are going to have a conversation around how you find these team members. Some team members are found a specific way, but in general, you’re gonna find these people in a similar way… And then we’re going to actually talk about the process for hiring two of your team members in this episode; that would be the business partner and a mentor. Over the next three episodes, we will go over the process for hiring the remaining team members.

Why Your Syndication Team is Important

If you remember, in episode 1527, when we discussed the market evaluation strategies. If you remember, we posed the question, “What’s the most important factor in real estate?” Obviously, in that episode we went over how to select and qualify a target market, but what I said is that the overall MSA or city is not as important as the actual neighborhood or submarket, and the neighborhood and submarket are not as important as the actual deal, but all of those things are trumped by the ability to execute the business plan. So the market is not the most important factor, nor is the deal, nor is the cap rate or anything else. The most important aspect of real estate, and in particular apartment syndications, is the ability to execute the business plan. Because, if you can’t execute the business plan, then the best deal and the best market really means nothing.

We said that one way for you to build up your ability to execute the business plan is obviously gonna be your education and experience, but the most important piece is going to be your team… Because, when you are first starting out, you’re not going to know how to execute the business plan properly, and that’s kind of the catch-22 because the best way to learn how to do it is to actually do it, but you can’t really do it until you’ve done it before. So the way to get around that is to surround yourself with an incredible, experienced team who has experience executing the business plan in the past successfully. So that’s what we’re going to talk about over the course of this next four-part series.

Who Are Your Team Members?

I just wanted to start off by mentioning how important your team actually is because your team is gonna be the one that’s gonna be helping you implement the business plan. With that being said, who is on the apartment syndication team? I’ve broken it into two different categories. The first is the core team members – these are people that you are essentially working with on a daily or weekly basis and are pretty heavily involved in the process… Whereas the other team members are more deal-specific or maybe you have meetings with them once every quarter or once a year; those are your secondary team members.

The four core team members are gonna be a business partner, a mentor, a property management company, and a real estate broker or brokers. Those are gonna be the four most important members of your team.

The secondary team members are going to be the attorneys, so the real estate and securities attorneys); as well as a mortgage broker or a lender; and then, finally, an accountant. Essentially, there are a set of companies that you’re going to need to bring onto your team.

In this episode, we’re going to talk about the first two, the partner and the mentor. In part two we’re going to talk about the property management company. In part three we’re going to talk about the real estate brokers, and then, in part four, we’re going to talk about those secondary team members. For this series, there is going to be a free document, of course, and it’s going to be a Building Your Team spreadsheet, so it will be a place for you to log the contact information of all the various team members that you need… Kind of like a checklist to make sure that you’ve got all of your bases covered. To download that document, you can find it in the show notes of any of the four episodes in this series or at SyndicationSchool.com.

How to Find Syndication Team Members

Before we dive into the process for hiring a partner and a mentor, I wanted to discuss how you actually find these team members. Again, for some of them, it’s gonna be a very specific way to find them or you might have a different strategy in mind or have heard of ways to be able to find people in the past… But, generally, you’re gonna find all of these team members through one of six ways.

Through Your Thought Leadership Platform

The first way to find potential team members is through your interview-based thought leadership platform. In last week’s series – it actually was a four-part series, so the previous two weeks – series seven and eight, we discussed the thought leadership platform and the importance of building a brand as an apartment syndicator… And one of those benefits was the networking capabilities of having an interview-based thought leadership platform. You are having a conversation with one real estate professional every week, bi-weekly or once a month, and that person, in particular, could be a potential team member or maybe they know someone who could be a potential team member.

For example, you could make it your goal to try to interview at least one person from each of these four team member categories a month. Maybe one month you’ll interview a potential partner and the next month a potential mentor and the next month a potential property management company and so on and so forth… And you get the dual benefits of having a podcast or YouTube episode, but also you have the opportunity to meet with them, talk with them, get to know them, and see if they would be a good fit for your business.

Again, I’m just talking about how to find these people. We will go into particulars on what to do once you’ve found them in the later sections of this episode for the partner and the mentor.

Via Other Interview-Based Thought Leadership Platforms

Another way to find potential team members is through other interview-based thought leadership platforms. For example, you could listen to this daily podcast, so there’s seven different real estate professionals every week, 365 every single year, so maybe one of those people could be your property management company or a mortgage broker. Right now, our sponsor is actually a mortgage broker, so that’s the perfect example of a way to find a potential team member. Listening to the other podcasts, watching the real estate YouTube channels, reading blogs…

At Real Estate Meetups

The third way is to attend local apartment meetup groups; go there, network, talk to people, figure out who is doing what, and see if they could be a potential team member. I know at Joe’s meetup group, for example, there is a section of the meetup where people get to ask a question or have an ask… So, if you’re at this point in the process, your ask could be, “Hey, I’m looking for a mortgage broker. I’m looking for a real estate broker. Do you have any recommendations?” and build a list.

With the Help of BiggerPockets

The fourth way is through Bigger Pockets. There’s millions of active real estate professionals on Bigger Pockets. You can use the search function… For example, me in Tampa, I’d say, “Tampa Bay property managers”. Compile a list of all the profiles and reach out to them and ask them to set up a phone call to discuss a conversation about potentially bringing them on as a team member. Now, for the Bigger Pockets strategy, I recommend only contacting people that are actually active on Bigger Pockets. If their profile has been inactive for multiple years, or if they don’t have any posts, then that’s not as good as someone who’s actively posting multiple times per day because that’s the indication of that person’s business acumen and work effort and things like that.

Through a Basic Web Search

Another way is simply just to use the internet. You can Google the top property management companies in your market, top real estate brokerages in your market, compile a list of those, and reach out. Give them a call. That’s actually how I found my real estate brokers and property management company – I use Google.

Syndication TeamReferrals

And then, lastly, but most importantly, the best way to find prospective team members is through referrals. The main source of your referrals could be a mentor – we’ll get to that person here later in this episode. Once you’ve found a mentor who’s an active apartment syndicator, who has a track record of success, obviously they’re tapped into the market, they’re tapped into the industry, and they should be able to provide you with connections to the various team members that you need.

Another approach is to bring on a property management company first, or a real estate broker, or a mortgage broker, and all three of those people will work with all the team members that you would need to bring on, so you can ask all of them for referrals as well.

Really, the best way to find these people is through referrals, and those first six steps, except for maybe with the exception of the internet, are kind of essentially referral-based. So that’s how you find these team members.

Again, there’s particular ways to find a certain team member that might not work for a different team member but, in general, those are going to be the top six ways to find your team members.

The Process of Hiring Your Syndication Team

Make of Note of What You’re Lacking

Now, let’s get into the meat of this series, which is the process for actually hiring these team members. In this episode, I’m going to talk about the partner and the mentor. First of all, not every single person is going to need a partner or a mentor. It really depends… For example, for the partner, if you want a business partner, it should be someone who complements your strengths and interests, first of all. And they make up for the areas that you are lacking in.

A few examples – for me, I have a strong operational background. I understand the acquisition process, I am very detail-oriented, and I have the strongest experience in underwriting, as well as managing deals in the back-end… Whereas something that I’m lacking in is access to private capital, the ability (or really the interest) to raise money. So what I did is, rather than attempt to do all that by myself, I decided to bring on a partner for the specific outcome of raising money. So I didn’t find someone who also liked to underwrite or someone who also wanted to be an asset manager; I found someone who was hyper-focused in the one skill that I was lacking in. That’s what you need to do.

Starting out, that might be a little different for you because you might have no experience or no credibility or strength; you actually might think you do… But you’ve gotta be a little creative. Based off of your educational background and your experience background, what do you have to bring to the table? What is it exactly? It’s gonna be something that you are good at and want to do and then, once you’ve identified that, you want to find other people, other partners, to complement what you’re able to do.

Find People Who Fulfill Specific Roles on Your Syndication Team

What do I mean by “do”? What exactly do you need on the general partnership side for the apartment syndication? Because you’ve got your passive investors who are investing in the deal and you’ve got your outside third-party team members who are finding deals for you, they’re managing the deals afterwards, but at the end of the day, apartment syndication is a business and you’re gonna need to have a team of people who are actually fulfilling the roles of that business.

There’s actually five parts to the general partnership. The first part would be someone who funds the upfront costs. This is the person who funds the costs from contract to close, although they’re usually reimbursed; you’re gonna need someone on the team that does that. There’s also gonna be someone that does acquisition management; they’re gonna find the deals, underwrite the deals, submit offers on the deals, manage the due diligence process, secure the financing, oversee the closing process… Essentially, everything from start to close.

You’re also gonna need a sponsor, also known as a key principal or a loan guarantor. This is someone who meets the liquidity, net worth, and experience requirements set forth by the lender, and they sign on the loan. There’s also going to be the investor relations person; they’re the ones who find the investors, secure the commitments once there’s a deal under contract, and is responsible for the ongoing communication with the investors.

And then, lastly, you’ve got the person who’s the asset manager. They’re the ones who manage the business plan and the management company after close. All five of those could be done by one person. One person is gonna be responsible for each; it could be really a combination of those two. And, usually, when you’re starting out, it’s probably going to be at least two GP’s.

For example, you might have one person that’s responsible for acquisition management and asset management; another person is responsible for investor relations. They’re a sponsor and they fund the upfront costs… But, more than likely, there’s gonna be a lot of GP’s. You might have one person who’s funding the upfront costs, you might have multiple people who are finding and underwriting deals, so they’re responsible for acquisition management; you might have ten sponsors to help you qualify for that loan, and you might have ten more people who are helping you raise money for the deal, and then a few people doing the asset management.

Determine Compensation

For each of these parts, there is a general compensation or general percentage of the general partnership assigned to each of these, so that’s how you know how to compensate your partners, as well as how you’ll be compensated. If you remember, in episode 1513, we discussed all the different ways the general partner makes money; that essentially goes into a pot, and if there’s one GP, then they get 100% of that pot. If there’s multiple GP’s, then the percentage of the pot that they receive is based off of the role that they’re fulfilling.

For the person who is responsible for the upfront costs, they’re getting reimbursed; there’s a little bit lower risk so, typically, they’ll receive maybe 5% of the general partnership, or there might be some other agreement that they make with that person, and then they’ll get any percentage of the general partnership. Maybe they get interest rate while the money is being held, or something like that.

For the acquisition management, that is obviously a much bigger role because you’re finding the deals, offering the deals, managing due diligence, and so on. So that is typically around 20% of the general partnership. The sponsor, key principal, loan guarantor, that person who signs on the loan – that could be anywhere between 5% and 20%. Now, why such a wide range? Well, it depends on the risk level of the deal. If it’s a turnkey property, it’ll probably be on the lower end of the range, whereas, if it’s a highly distressed business plan, then they’ll have to give them a little bit more because the risk level is increased.

It also depends on the type of loan. For example, if the loan is recourse, which means that the loan guarantor is personally liable, then you’re gonna have to offer them a little bit more than if the loan was non-recourse, which means they aren’t personally liable, unless a carve-out is triggered.

It also will depend on your relationship with this person. If you have a personal connection, a trusting relationship, with the sponsor, then they’ll likely charge you a little bit less, whereas, if they have no idea who you are, they don’t know your abilities, they don’t know you personally, then you’re gonna have to give up a little bit more of the general partnership to bring them on.

Other examples of ways to compensate this person is you could just give them a percentage of the principal balance at closing. On the low end, that could be 0.5% to 1%, on the high end that could be 3.5% to 5% of the loan balance, one lump sum paid to them. That could be in addition to or instead of the percentage of the general partnership.

Next, the investor relations person. That is also, obviously, very important, and it could likely be multiple people. That could be anywhere between 30% to 40% of the general partnership. And then, lastly, you’ve got the asset manager who would get 20% to 35% of the general partnership.

Qualifying a Potential Partner for Your Syndication Team

Now, how do you actually qualify a potential partner? Here are a few things for you to think about when you are talking to either potential business partners, like straight-up 50/50, breaking this apart 50/50, or when you are bringing on someone for a particular duty, like investor relations or as a sponsor.

Take Their Track Record Into Account

Number one, you’re gonna want to know what their track record is, in real estate and in business, similar to why you need a track record in real estate and in business before becoming an apartment syndicator… And you’re also gonna want to get a little bit more specific and ask them what is their track record on the specific thing they’re supposed to do. If they’re supposed to raise money, what’s their track record on raising money?

Find Out How Much Time They Can Devote to Your Partnership

You also wanna know how much time they have to spend on the business. Do they have a full-time job where they’re working 100 hours/week and they can only dedicate a few hours a week to their duty or do they have a more flexible job that allows them to give their responsibility the attention it deserves?

At the same time, you wanna know, especially if you’re doing 50/50, if they have the same amount of time that you have because that might bring up issues in the future if they’re working 20 hours a week in the business and you’re only working 5 hours a week, or vice-versa.

Consider if They Have Complementary Skills to You

You’ll also want to know if they have complementary skills to you. You wanna know what they’re good at, and what they’re bad at or inexperienced at, and see if you are essentially the opposite. So what they’re good at, you’re not good at or experienced at, and vice-versa.

You also want to know if you have complementary personalities. Essentially, can you get along with this person, or are you both very stubborn? Do you both need to be in charge, in control? Kind of on a more emotional, personal level.

Discuss Your Goals

And then, lastly, what is your long-term goal? If your goals are too far apart, it also probably won’t work out. If you wanna make a billion-dollar company and they only wanna do a couple of deals before getting out then, again, that might bring up issues down the road.

Now, for the person who’s just starting out – and if you’re a browser of Bigger Pockets, you’ll see a lot of people asking questions about wanting a partner because they are inexperienced… And, if that’s the case, then obviously you’re gonna have to win them over. You’re gonna give them something to add value to them, or else why would they be working with you?

Reaching Out to Potential Partners and Syndication Team Members

A few strategies on how to actually be presentable when reaching out to potential partners who you actually need in order to help you complete the deal, whereas they don’t actually technically need you…

Have Experience

Number one is to have that strong business and real estate background. If you wanna know what that means, make sure you listen to episode 1499 and 1500 where we had a conversation about that. You also wanna make sure that you display your apartment investing expertise. While having a conversation with them, let them know that you know what you’re talking about, basically… Which means that you can answer their questions on what markets you’re investing in, your investment strategy… Essentially, the questions that you’re going to be asked by the property management company, real estate broker, other team members… We’ll go over that in the future episodes.

Add Value

You’ll also wanna bring something that they need to the table. Figure out what they need and help them with that. Maybe you have a particular skillset that they need or maybe you have money, but you need help with everything else… You need to bring something to the table, rather than just wanting to do a deal and that’s really it.

Connect to Them on a Personal Level

Also, try to form a personal connection. I know a lot of people have success wining and dining, going out to the bars for a drink or at restaurants, playing golf, and kind of just building a personal trusting relationship with this person so that they trust you and they’re willing to work with you.

Offer Payment

The last option is just pay them. Pay them money to be your partner. In that case, they’re essentially going to be a mentor, which is a perfect transition to the next section or the next team member, which is the mentor.

Your Syndication Team Mentor

The mentor is going to be a paid consultant, so I’m not talking about someone who is like a fatherly figure to you who you aren’t paying; this is someone you’re actually paying. A lot of people have different opinions on whether or not you need a mentor, and I’m not going to say whether you do or don’t need a mentor. Instead, I’m going to talk about what to expect or what not to expect from a mentor, and when you are ready to actually hire a mentor… And then the decision is ultimately up to you.

What to Expect From Your Mentor

Whether you need a mentor really comes down to your expectations of what a mentor will do for you, as well as why you’ll want to hire a mentor. The four things that you should expect out of a mentor is:

An active, successful apartment syndicator; they’re currently doing it, they’ve been doing it in the past, they plan on doing it in the future, and they’ve been successful.

You should expect a step-by-step system, as well as the personalized help for you to navigate the grey areas. They should have a system for you to plug into to replicate their success, but you actually have to do the work… And things that aren’t covered by that system, you should be able to talk to them about those grey areas.

A mentor is an ally that you can call on selfishly about anything. Since you’re paying them, you don’t really have to worry about asking them about their day or how things are going for them, because you’re paying them to just talk about yourself.

And then, four, you should expect connections. Again, since they’re active and since they’re an apartment syndicator, they should have connections to the people that you need to help you create your team.

What You Shouldn’t Expect

Now, the two things that you shouldn’t expect… Number one is a knight in shining armor. Don’t expect to hire a mentor and then magically have a multi-million-dollar apartment syndication business in a couple of years. Expect to go in there and actually have to do the work yourself. They’re just gonna give you a leg up. And, lastly, don’t expect that done-for-you system. Again, you’re gonna be doing the work yourself; you don’t want them to do everything for you. Number one, they probably won’t be doing anything for you, and two, even if they did, you’re highly dependent on them and they’re never gonna be able to break off on your own.

What Should a Syndication Team Mentor Do?

Now, what does a mentor actually do for you, besides those four things to expect… 1) Providing you with a step-by-step system; helping you navigate the grey areas. 2) Being an ally to call upon. 3) Connections. 4) Them being the active, successful apartment syndicator…

You will also have the ability to leverage their credibility when talking to team members and to potentially passive investors, as well… Because you’re gonna say, “Hey, on my team there’s a board member who has done multiple millions of dollars in deals; they’ve been doing it for 20 years”, and then, also, you’ve got the potential for alignment of interests. Just the fact that they’re being on your team, you can leverage their credibility, but they also might have some sort of stake in the deal, whether it’s a sweat equity stake of actually working on the deal or they have their own money in the deal. Those are the things that a mentor could do for you.

When Should You Hire a Mentor?

How do you know you’re ready to hire a mentor? And not everyone is at that point right now… The two things that you need to do in order to be ready to hire a mentor – number one is to have the accurate expectations, which now after listening to this episode you actually have those expectations. And number two is to have a defined outcome. What is it exactly you want to get out of the mentorship? You need to know exactly what it is. Is it to find deals, is it to bring on team members…? It just can’t only be an apartment syndicator; it has to be something specific so that you can leverage that person accordingly.

If what you really want are connections, then the expectation is that the mentor should offer connections. So, when you’re talking to mentors, ask them about their connections and then, once you’ve actually hired them, make sure that’s your focus, at least at first.

How to Compensate Your Syndication Team Mentor

Now, how a mentor is compensated is really based on their compensation structure for their program… But I would expect to pay at least a few thousand dollars for a high-quality mentor. But, again, since we’re dealing in a hundred-thousand, multi-million-dollar industry, what’s a few thousand dollars if you’re able to close on a deal?

Qualifying a Mentor

Now, the thing to think about when you’re qualifying this person – number one, are they an apartment syndicator? Number two, are they still active? And three, do they have a successful track record? By successful – did they meet or exceed their return projections on their deals? You don’t want someone who just teaches apartment syndications but hasn’t actually done it before or isn’t still doing it because, like everything, it’s an evolving industry. And, if they were successful in the past, it might have been because something that happened in the future that didn’t affect them because they were buying the deals at that point in time. So make sure that they’re actually an apartment syndicator, that they’re still active, and that they have a successful track record.

Win Over Your Mentor

Now, I did say that the mentor is a paid person, so obviously, your way to win them over to your side is to pay them money… But once you’re actually in their program, there are still a few things that you can do to set yourself apart from the other people in the program in order to hopefully get extra help from them, and ideally, have some sort of stake in the deal… And the best way to do that – and it’s very simple said but harder in practice – is to actually make sure you remain active in their program and actually do the exercises. Once you get into the program, they’re gonna have some system for you, and it’s probably gonna start off by you getting educated and then kind of going from there… Make sure you set time each day to actually perform those exercises. Don’t just pay the money and then disappear. Make sure you’re active, actively asking questions to show that you’re serious about closing on a deal.

And then lastly, you can listen to episode 1507, “How to Break Into the Apartment Syndication Industry”, to learn another tactic for how to win over a mentor. In this specific strategy, it’s technically not a mentor because you’re not paying them money. You’re paying them in a different form… So I would definitely recommend checking out that episode (1507).

That wraps up this episode, the part one of the four-part series about forming your apartment syndication team. In this episode, you learned about the four core team members and the three secondary team members that make up your seven-man team, or seven-woman team, or seven-company team. You also learned the top six ways to find your prospective team members and then, lastly, you learned the process for hiring a business partner(s), as well as a mentor.

In part two, we will discuss the process for hiring a property management company. The fact that we’re dedicating an entire episode to just the property management company should tell you how important they are to your success.

Until then, to listen to other Syndication School series about the how-tos of apartment syndications, and to download your free team-building spreadsheet document, visit SyndicationSchool.com.

Leslie has over 20 years of experience in the financial services industry. She works with commercial investors and helps them get their deals funded. She’ll get creative and they will finance in situations where a lot of banks will not. Hear what lenders like Silver Hill are looking for in their clients. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Leslie Smith. How are you doing, Leslie?

Leslie Smith: I’m doing great, thanks.

Joe Fairless: Well, I’m glad to hear it, and welcome to the show. A little bit about Leslie – she is the managing director for Commercial Direct, which is a consumer-facing direct lender. She led the launch of Silver Hill Funding in 2016, and she is an experienced financial services professional and thought leader, and has been one for more than 20 years. Based in Coral Gables, Florida. With that being said, Leslie, will you give the Best Ever listeners a little bit more about your background and your current focus?

Leslie Smith: Sure. I’ve been in financial services for most of my career, with originations in particular; I came into commercial originations about 12 years ago. It’s had different flavors, given how lending has changed over the last 12 months, but still, strictly in the commercial space.

Personally, I’ve been a banker, and now an originator at a non-bank institution, and it’s quite different and interesting… Both interesting, but still very different.

Joe Fairless: What’s different about the two?

Leslie Smith: Well, when you’re thinking about a bank – it has its own rules in a box; it’s kind of pre-determined for you, for many different reasons, whether it’s the risk tolerance of the bank, whether it’s the regulations that really kind of shape the lending decisions…

For a non-bank lender, you have a little more flexibility. There are still rules that we have to abide by and regulations, but less regulatory oversight, so therefore it gives you flexibility to change more quickly, adapt to what the market needs and wants more quickly… And that’s generally been my experience – that speed to entry into the market, and flexibility to be much more creative on the lending side.

Joe Fairless: What are some specific examples of where you have more flexibility?

Leslie Smith: For my platform, we do small balance commercial loans nationally, and where we see flexibility, for example, is a lot of our customers come to us for cash-out. They’re looking to refi their current commercial property for cash-out, and the reasons for using that – there’s many different reasons, but the main reason is either to acquire another property, or reinvest in their own business and improve it.

From a banking perspective, that’s rare, for someone on the small balance side to get cash… But we’ve got uncomfortable from a due diligence credit perspective to be able to offer cash-out to the small borrowers… And what I mean by small – let me step back and say that our average loan size is about $350,000, so we are talking small. Our range is 250k to 5 million, but the core of our small business owner borrower is in that 350k range.

Joe Fairless: Got it. And what is a typical project that a customer has that you lend on or help with that cash-out refi?

Leslie Smith: From an investor perspective, they’re gonna buy another property, depending on where they are in their experience; we see a range of folks that have already bought single-family homes and have a nice, small portfolio, and then they’re kind of migrating into more multifamily properties… So we see that kind of cash-out, to invest in another property.

Another would be purchasing more equipment. We’ve seen folks trying to expand their businesses and buying additional equipment, or even just improving the look and feel of their current property; especially from a restaurant/bar perspective, there’s a lot of competition, so people wanna do a refresh. So those are some of the reasons they use the cash-out.

Joe Fairless: With a bar owner versus an apartment building owner, what are the different nuances of the underwriting process?

Leslie Smith: At the core of it is really how do you really look at their income. A lot of our borrowers have really not fully documented their income, and that’s where banks are just not comfortable lending. What we’ve done is figured out a way to find that income. It’s not always through tax returns [unintelligible [00:06:55].26] Bank statements. We can analyze a couple of full years of bank statements, and you get a lot more about the health of that business in that way. That’s one way. You also leverage a lot of third-party data to assess what’s happening in that business.

On the smaller side it’s slightly more difficult, because there aren’t that many data points when you have an auto park place or a small little retail strip mall, but still, you could be surprised how much you find out about someone and their business by simply googling.

Again, you have to be creative, you have to use non-traditional means to figure out whether this person is a good borrower and they’re gonna repay.

Joe Fairless: And earlier you said during the due diligence you look — credit is one thing, and then due diligence that you do on them is another thing… From a credit perspective, what do you look for?

Leslie Smith: We’re looking for a minimum score of 650 to start, as a FICO score.

Joe Fairless: What if it’s 625 but they’ve got a really good story.

Leslie Smith: I’ve done that. The story is important. When you’re talking about someone that’s asking for a $350,000 loan, that’s gonna be storied. If someone has the ability to go to a bank and get a loan, they’re gonna get that loan, especially if they have a local banking relationship. But the story is really important, whether it’s a 700 credit score or 625, there’s gonna be a story, with our borrowers in particular. And a lot of times that 625 – it may be a one-time hit, like maybe they maxed out their credit card for one month… And we see that. We see that because some people run their businesses that way. Particularly if you refurbish homes, you run up a bill of Home Depot, but you pay it down… And we just kind of take a second look at what affected that credit score.

The story to me is very important. It tells a lot more about what we’re looking on on paper, and actually brings it together. And frankly, as a national lender doing this out of Coral Gables, we’re just looking to see whether the documentation, the story and what we find from third-party sources aligns. That’s what we’re looking for. So for me, storied loans are what I like, and what we see every day.

Joe Fairless: What type of terms are typical for one of your customers?

Leslie Smith: A typical term for us is a 5-year term, 30-year amortization. Typically the loan-to-value is in the 68%-70%.

Joe Fairless: Got it. And when you come across a client and it just doesn’t work out, what’s the most common reason why it just doesn’t work out?

Leslie Smith: Typically for us it’s an unstabilized property. We’re the type of lender that’s looking for a higher occupancy; that’s one. The second piece is really that the story doesn’t align. We find some really significant holes in what they’re telling us and what’s really happening as we complete our due diligence. The third is real estate value.

Joe Fairless: Will you elaborate on real estate value?

Leslie Smith: Typically, when we’re refying, a lot of times people feel that their property is worth a lot more than it actually is. In addition, you have a lot of investors that have put in a lot of money into a serious investment into a property and refurbishing it, and a lot of times they’re new to that, and they think that for every dollar that you invest, it increases the value, and it doesn’t do that; it doesn’t translate into that. There are many other factors that go into that value.

Joe Fairless: What are some renovations that an owner did where they thought it would increase the value, or they thought it would increase value more than what you thought? I’m curious what those renovations were.

Leslie Smith: Specifically, I would say a lot of times they are really focused on the quality – more expensive tiles, and expensive wood fixtures, and cabinetry, and it’s good quality stuff, but if it’s just an investment property and they’re not living there, they need to think about do they really need the most expensive tile? Could they just not necessarily remodel the entire bathroom, but just fix it, and make it look presentable to rent? I think that’s where a newer investor really is not aware. Also, they don’t necessarily hire the right contractors, and that bill can increase that overall cost of that renovation.

Joe Fairless: Yeah, right. So if someone else could have done the same exact work, paid half as much, and both parties got the same increased valuation, but one party paid twice as much as the other.

Leslie Smith: Yeah. I mean, I think a success story there is when you have an investor that already has partnerships and established people they use. They have a contractor, they have people that do specifics, and they as a pod continue on to different investments… And you kind of formulate a strategy by which “This is what it’s gonna cost me to do this, and these are my people, and my timelines have been pretty much consistent.” That’s when you know someone’s a little bit more experienced. They’ve probably made a mistake or two and they’ve learned from it, and now they have a method by doing the investment that makes sense.

Joe Fairless: Okay. Hypothetical scenario – I’ve got a 50-unit apartment building I’m gonna want to do a cash-out refinance… What would be the reason why I’d go to you versus a community bank?

Leslie Smith: A couple of reasons. If you’re gonna personally guarantee that loan, as most banks would want, are you comfortable with that personal guarantee? Are you talking about purchase only, or refi?

Joe Fairless: We’ll do refi.

Leslie Smith: Okay. So refi – number one, the bank probably won’t give you the cash that you want. Number two, they’re probably going to look at that real estate — because I’m not doing class A real estate. If you look at some of my properties, they’re not as pretty when you take a picture of them. So that’s another reason you would come here. If your property is not in the best neighborhood and it is not fully occupied, you’re probably gonna come to me. If there are concerns around environmental, you’re gonna come to me. If you want to close a loan really quickly – our average close is about 45 days – you’re gonna come to me.

Joe Fairless: Got it. What about on a purchase? If it’s not a refinance, but if it’s a purchase? What would be any differences or new things that you’d mention?

Leslie Smith: It’s probably the high LTV. We go up to 80%. So if you’re purchasing and you only have to put 20%, it makes a big difference.

Joe Fairless: Okay. And did I hear you correctly that you don’t require a personal guarantee?

Leslie Smith: In certain scenarios, your pricing is better if you do personal guarantee. If you do a personal guarantee, then we’re adjusting your overall rate to less risk because you’re personally guaranteeing. If you’re non-recourse, then the pricing looks different. So there are both options.

Joe Fairless: Will you give a hypothetical scenario for what the difference would be between guaranteeing it and not guaranteeing it?

Leslie Smith: I think you see a non-guarantee when you’re an investor, and this is not something you’re willing to put your personal net worth into…

Joe Fairless: Sorry, what I meant to ask was from your side, the difference in terms between the guarantee versus non-guarantee – what is a difference in terms typically between those two?

Leslie Smith: From an LTV perspective, you’re not gonna get to 80% of you’re not guaranteeing the loan. Your interest rate will probably look more if you’re not guaranteeing the loan, in the eights to nines, and if you’re guaranteeing the loan, you’re looking six to seven.

Joe Fairless: What’s the LTV usually?

Leslie Smith: For a guarantee, or a non-guarantee?

Joe Fairless: Guarantee you said it was around 80%, so for a non-guarantee.

Leslie Smith: Probably in the sixties.

Joe Fairless: Sixties… So for someone listening who has not been through this process, and they hear you say 8%-9% and 60% loan-to-value, they’re like “Oh, my gosh… Those 8%-9% interest rates… That’s twice as much as what I see when I search interest rates right now on Google.” What’s your response?

Leslie Smith: A couple things. Interest rates continue to increase. We’re in a very different place than we were last year at this time, generally… And also, we’re taking on risk. We’re taking on risk on someone probably — that profile of that borrower, their credit score is not the best maybe, the property probably is not in the best location, or has some sort of issue with it, where a traditional bank where they would give you that 4%-5% would give… So the pricing reflects what your scenario is, and the risk that the lender is taking. That’s really what it is.

Particularly if you’re thinking about doing a cash-out, if you’re gonna do unsecured, you’re gonna do double digits. If you’re gonna get a working capital online with any of the OnDecks of the world, that’s gonna be double digits and that’s gonna be a really harsh loan. We’re talking about using your current real estate, getting a loan that makes sense, and it’s not going to come due in 18 months. So it’s a couple different reasons, but literally the 8%-9% and 60% is just the risk that we’re taking with the property and the borrowers on the loan.

Leslie Smith: Know your objectives. You really have to have a plan, because I think that if you think it’s a good idea but you don’t really know what you want out of it, that really affects who you choose to work with and who your lender ultimately will be. It’s really important for you to know what you’d like out of that investment. If it’s short-term or long-term, then there are different lenders out there, and different costs to that loan, so it’s really important that you really know what you’re looking for.

Joe Fairless: Short-term or long-term, so thinking through how long we want to hold the property… What are some other questions we should ask ourselves when determining those objectives?

Leslie Smith: I would say also is this just gonna be a one-off, or are you building a nest egg for yourself, and are you building long-time wealth with this? That’s different, as well. I think that we see a lot of folks that really are thinking about their long-term wealth, and not just kind of a fix and flip and we’re done… So you have to kind of step back and consider that.

I would say don’t limit your investment property to where you live; think about maybe another area that is up and coming… So understand what’s happening in the neighborhoods, and maybe invest outside of where you live… Just in case anything happens, at least your particular property is in another part of the city that’s thriving if where you live is not.

Diversify. Don’t necessarily always buy in the same neighborhood or the same property type. Thinking about whether you could align yourself – if it’s a nest egg type of scenario – with a property manager to help you manage those properties effectively. I think that was maybe the most important…

Joe Fairless: If someone calls you up and they say “Hey, I’ve got a deal I want to do a refinance on”, what are some of the questions that you will ask during that first phone conversation?

Leslie Smith: Credit score, number one. What is your credit score right now? How long have you owned the property? That matters, for us particularly. If you have someone that has kept their property and their business through the recession, that speaks volumes. We ask also are they current on their personal home mortgage? That’s very telling to us from a consumer behavior perspective. If you’re current on your mortgage, that says something about you as a borrower.

We also talk about “Can you validate your income?”, because that then takes us to different types of conversations… Because we have a Full Doc program where you have bank statements, and tax returns – your more traditional underwrite… And then you have a Lighter Doc version, as we talked about earlier, which is our bank statement program.

So those are the questions that we ask, so then we can counsel as to where would be the best program to place them… Or from the beginning we could say “Well, maybe we won’t be able to do it.” Maybe their credit score is 500 and we won’t be able to do that loan, but at least those qualifiers upfront help us understand what they’re trying to do.

Joe Fairless: If it’s a Lite Doc program where you verify income through bank statements, does that mean they will have less favorable terms than if it was a Full Doc program?

Leslie Smith: Oh, my goodness… I’m a listener now. I’ve actually really adopted Audible very much. So I would say the last that I listened to that was pretty good was “Something in the Water.” It’s a murder-mystery. It’s what I like.

Joe Fairless: Sounds intriguing. What’s the best ever challenge you’ve solved in over 20 years of being in the financial services?

Leslie Smith: Hiring the right people. Hire slowly, fire quickly. Without a team that’s strong and that’s agile it’s really difficult to build a business.

Joe Fairless: Best ever way you like to give back?

Leslie Smith: I give back to my local university. I like to mentor a lot, whether it’s within our own organization – I participate in mentoring – and also within my local university… Because I think when people see a person that went to their school, graduated, and now their career evolved in a very non-traditional way, I think it helps people feel less about not becoming a doctor or a lawyer, or something that’s much more formed and shaped… That, I think, is the best way. I’ve also been able to recruit really great people that way over the years.

Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?

Leslie Smith: Well, you can find us at CommercialDirect.com, and you can find me through LinkedIn as well.

Joe Fairless: Leslie, thank you so much for being on the show, talking about the different types of loans that you do, how you qualify your customers, and the pros and cons of the loans, as well as the getting into specifics of the due diligence that you look at. It’s important that we know that, as borrowers, so that we know what to have prepared whenever we speak to a lender… So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Ben got started with real estate investing in 2005, and was caught in the 2008 crash. He started educating himself more and went all in with real estate investing and education. He got started (again) by buying distressed bank owned properties and is still growing his business to this day. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Ben Fredricks. How are you doing, Ben?

Ben Fredricks: I’m doing awesome, Joe. Thanks for having me.

Joe Fairless: Yeah, my pleasure. Nice to have you on the show. A little bit about Ben – he is a real estate investor who specializes in bank-owned and REO properties in bulk from auction. He has purchased and sold over 150 properties in the last 12 months. He offers seller-financing to investors looking to grow their portfolio. He’s based in Port Orange, Florida. You can get a hold of him at his website, which is in the show notes. With that being said, Ben, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ben Fredricks: Sure, man. I got started in real estate pretty much at the wrong time, 2005-2008, and I just wasn’t ready from an education and mindset standpoint, and obviously everything went haywire. I actually worked for Lehman Brothers at the time that the economy collapsed, and it was just the perfect storm. We owned rental property, and we started losing tenants, because they were losing their jobs, and the dominoes just fell.

After that, I really had to reassess what we were going to do, because I knew I had to get back into the game, but I really kind of decided at that point that I was gonna commit full-on to education, between books and podcasts like yours, good seminars, bad seminars, you name it… I just spent a lot of time feeding my brain after that… And really — this might sound kind of corny, but I became a really big believer in the law of attraction in The Secret, and I just kind of started putting out into the Universe what I wanted… And soon enough, I started to receive it.

I met my mentor, my current partner off of (believe it or not) a Craigslist ad, of all things, and it changed my life… But it changed it because I was actually ready for it at that point. After that, I took massive amounts of action and then found myself in this arena of buying distressed bank-owned assets in bulk, and that’s how I got to where I am today.

Joe Fairless: Best seminar you’ve been to and worst seminar you’ve been to?

Ben Fredricks: I don’t wanna throw anybody under the bus… I think the best seminar I went to was by a friend of mine named John Cochrane. He kind of gave me some great insights into wholesaling and what I needed to know, even though that’s not really what we do in the sense that we’re not finding motivated sellers to wholesale contracts… But he gave me a lot of insight on how to market and do some good things. And from bad seminars – I think people have been to enough bad seminars, and I don’t need to call anybody out.

Joe Fairless: With what John taught you about wholesaling, what specifically did you use to apply that to what you do?

Ben Fredricks: It was mostly a lot about the marketing. So you acquire a property, and then how are you going to get rid of it? How are you going to put it out in the marketplace so that you can flip it quickly, make a good profit on it, and give a good deal to whoever is actually buying it. So it was really kind of knowing how to put together the numbers, and then take in those numbers and making it an attractive deal to the marketplace. I think that’s where I got the most value from, learning from him.

Joe Fairless: And what are some tips for how to put those numbers together?

Ben Fredricks: Well, it’s an amazing day and age that we live in, so you can find just about anything you want online… Finding numbers from places like realtor.com, or iComps, and even Zillow. Zillow gets a bad rep of not always being accurate, but for the numbers that we do, it helps. Deriving numbers from those areas can really solidify what kind of deal you have, and then you know how to best price it. On these properties you don’t wanna always be at the top price; you wanna set your deal apart by coming in lower than everybody else, and that helps you know where to buy these deals as well.

Joe Fairless: 2005-2008 – you said you started in a very bad time, which, clearly, the economy collapsed in 2008, so I certainly would agree with that… You had a portfolio, it sounds like you lost that portfolio – is that accurate?

Ben Fredricks: That’s correct, yeah.

Joe Fairless: I imagine because of that things were tight financially to say the least, and you said earlier that you decided you would commit full on to education, there is a requirement usually of money in order to invest in your education — well, certainly with seminars, not with podcasts or things like that… So what made you decide to invest money into education when things were financially very tight with you and your finances?

Ben Fredricks: Yeah, I just didn’t see any other choice, and I knew that if I was gonna get back into the game, I couldn’t make the same mistakes again. Somebody once said to me, “The best investment you can make is into yourself”, and I really just tried to take that to task. It wasn’t easy, by any means. My wife and I did everything right, it seems, from the get-go. The properties we bought, we put 20% down, we maxed out our 401K’s and our savings, and it went terribly wrong… But what we didn’t account for was what happens if there’s negative cashflow… And we always just thought, “Well, we’ll make it up with our income if we need to”, and that was just stupid.

So not wanting to make the same mistakes again, there was really no choice but to invest in ourselves and then spend that money to get educated. So a lot of times, you’re absolutely right, it was difficult. I borrowed money from my 401K to make those investments in myself, and thankfully, they’ve paid off.

Joe Fairless: You met your current partner off a Craigslist ad. Will you elaborate?

Ben Fredricks: Sure. A couple years back I was at the point where I was like, “Okay, I’m ready. I wanna really dive back in.” I was working in financial services, I absolutely hated it, it wasn’t my passion, and I knew real estate was where I wanted to be, so I just started saying “You know what, I know people that are interested in being private money people, and let me see if I can put them together with people that have deals.” That’s really how I came about. I was essentially trying to be a syndicator. I said, “I will help you fund your deals. Reach out to me”, and that’s how I got a call. My partner called, and told me — funny enough, he said “This might be the greatest call you ever got.” It really was. I laughed at that time, but it really was. He changed my life.

Joe Fairless: And what were some steps after that call that changed your life?

Ben Fredricks: Well, I didn’t know what I do now really existed. I knew there were bank-owned properties, but I didn’t really know how people would be able to buy 30-50 deals at a time. So I went and met him for a drink, he was here locally in my market at his vacation property, and I learned about it. He said, “Well, you can come up and learn about it”, and I said “Absolutely.”

I came home and told my wife, “Hey, I’m going to this guy’s house in South Carolina, who I’ve just met and had one beer with, and I learned all about this business.” She looked at me like I was crazy, but it turned out awesome. It was really just taking a leap of faith and saying “You know what, this sounds like an amazing opportunity. Let me just take some action here.”

Joe Fairless: And was there a fee for you to go learn from him in that setting?

Ben Fredricks: Zero.

Joe Fairless: So what was his business benefit from meeting with you?

Ben Fredricks: I think his business benefit was saying “Hey, here’s a potential investor that can buy some deals from me.” That was his business – acquiring these properties in bulk and then having a big network of investors that would take these properties from him after he acquired them from the bank. I think he’s just a man that deeply believes in good relationships, and we hit it off. He’s like a father figure to me at this point. The benefit to him was saying “Hey, I might have a great relationship with somebody that’s hustling and wants to do big things.”

Joe Fairless: And how do you two – or the group, if there’s more than the two of you – structure your roles and responsibilities now?

Ben Fredricks: It’s run pretty much like a business where I focus mostly on systems – hiring, recruiting, people that are sales staff, things like that… Then one of my partners – he focuses on acquiring the deals and the properties; that’s his expertise. He’s been one of the biggest auction buyers in the last 40 years in the country. Then my other partner – he kind of runs the sales team and handles all of our distribution.

Joe Fairless: What’s “handles our distribution”?

Ben Fredricks: We have investors that we work with on a consistent basis, and he manages what they’re looking for, so we can help them find those deals.

Joe Fairless: Okay, got it. So high-level you’re responsible for the systems, and then another partner is responsible for bringing in the properties, and another partner is responsible for liquidating the properties.

Ben Fredricks: You got it, absolutely.

Joe Fairless: Okay, got it. How do you buy 30-50 deals at a time?

Ben Fredricks: Well, it didn’t start out that way. Initially it started out with buying two deals at a time. Then it took some time to work up to that. Really, what I wanted to do was just say “Okay, let me understand this process fully, let me do some deals, and then let me get very good at what we do, and then start taking that to the market.” Our first private money investor gave us about $150,000, and then over the last 12 months we’ve raised I think close to 3 million at this point. So it was really just doing what needed to be done and starting off, and then showing and proving that we can do what we say we do.

Joe Fairless: How long have you been doing this with the group?

Ben Fredricks: Close to two years now.

Joe Fairless: Two years. What’s been a challenge that you’ve overcome as it relates to the growth of the company?

Ben Fredricks: When you start acquiring a lot of properties, it does become cumbersome if you’re managing — like, right now I think we have close to 120 properties in inventory… So managing the day-to-day on those things, getting them signed, getting pictures and getting them uploaded to the website… It’s a lot of tasks that come along with it. And then you’re also managing the business itself, so it’s not an easy day-to-day thing. We have a hell of a lot of fun doing it; there’s certainly a lot of work that goes on behind the scenes… And we still don’t have it perfect, Joe. There’s so many things I miss the ball on when it comes to social media and things like that that we have to improve, but it’s a daily thing that we try to get better at.

Joe Fairless: What’s one thing that you’ve made the most improvement on as it relates to that?

Ben Fredricks: I think it’s making the transaction somewhat easy. We’ve hired a virtual assistant, so people can effectively and quickly do a transaction almost through our website. They can make offers and apply for financing and things like that directly on the website. That in and of itself cut down a tremendous amount of time in our day that was being spent reviewing offers and paperwork and all that stuff. So it’s really just trying to find those little time-saving pieces.

Joe Fairless: Is there a software program that you’ve purchased in order to do that?

Ben Fredricks: No, I had that developed by a website expert, so to speak, and I just told them what we wanted. They did it all through WordPress; that’s all technical stuff I have no idea about, because I pay somebody else to take care of it.

Joe Fairless: Ditto. What is the investment to pay someone to take care of that?

Ben Fredricks: It wasn’t much, actually. We interviewed a couple of people to do a website, and the first couple of quotes were ridiculous. They were like $15,000-$20,000, and this website I think we got done for about $3,500.

We have some little ancillary deals we constantly are working to improve it, so we might spend a hundred bucks here, a hundred bucks there to get some tweaks done to it, but overall it was pretty affordable.

Joe Fairless: Are there a lot of bank-owned properties still out there?

Ben Fredricks: Oh, my god… There’s tons. The banks were so slow, and there’s still inventory that’s just been sitting there because the banks haven’t gotten to it. So yes, there’s a tremendous amount of opportunity. And a lot of the stuff that we buy, people will look at it and say “Well, that’s a leftover. Nobody wanted it.” And somebody wants it, believe me. We wouldn’t have a business if somebody didn’t want it.

Joe Fairless: What’s a typical transaction?

Ben Fredricks: In regards to what?

Joe Fairless: Like a bulk purchase… What’s a typical bulk purchase that you all buy?

Ben Fredricks: Okay. Last month we got, I think, 44 properties, and I think we spent somewhere around $650,000 on that particular package. It just varies from month-to-month, and depending upon where we buy. Ohio, Michigan, Missouri, places like that in the Midwest – there’s just an abundance of deals that are available, that we can pick up for a couple thousand a piece.

Typically, our average deal is somewhere around 15k-20k.

Joe Fairless: Do you remember the last transaction that you all did?

Ben Fredricks: The last transaction… Well, we do quite a bit of them…

Joe Fairless: How about the most recent transaction where you remember some of the numbers and specifics? I just wanna learn about a recent transaction you’ve done.

Ben Fredricks: Sure. Well, today I was just working on an owner finance deal, and that was a triplex that we picked up in Mississippi for about 18k. We sold that on an owner finance note to a local investor. They’re putting $5,000 down, and it cashflows for us about $600/month for the next 15 years.

Joe Fairless: Wow. Where did you say that is?

Ben Fredricks: That’s in Mississippi.

Joe Fairless: That’s in Mississippi… You are not in Mississippi, you are in Florida, so how did you come across it?

Ben Fredricks: This was on a bank-owned asset. Typically, what will happen is the bank will come to us because they know we’re gonna buy, and they’ll say “Hey, we have these particular assets. These are kind of what we’re looking for out of them”, and then we can make the bids accordingly, based on what we think we could get for the property… Sort of what I was telling you about before, where we think if we could price it well enough to make it a competitive deal… So yeah, that’s pretty much how we get the deals.

Ben Fredricks: I think my best advice ever is if you fail, don’t be afraid to get back in the game and take massive amounts of action, and be different. I think someone else wise once told me “There are riches in niches.” I see so many investors doing the same things as other people, just trying so hard to find the perfect deal… Just start doing deals. If you can just start doing deals, taking massive action, working hard, you’re gonna find ways to be successful. That’s probably the best advice I can give.

Joe Fairless: Are you still focused on committing to your education?

Ben Fredricks: All the time. I’m a podcast junkie. I’m up at [4:30] every morning for the most part, listening to podcasts like yours, reading books… It’s become an addiction to me. Once we get the taste of “Hey, self-improvement… I feel better about myself, the condition that I’m in”, you can’t stop it, because if you stop, you start to slip back into those old habits of not feeling so great about yourself. So yeah, I cannot stop; it must continue.

Joe Fairless: And what are a couple resources…? Perhaps I should have saved this for the Lightning Round, but who cares…? What are a couple of resources that you recommend?

Ben Fredricks: As far as mindset?

Joe Fairless: Yeah.

Ben Fredricks: Well, as far as things that have helped me, Tony Robbins has been tremendously instrumental in my ability to have a better mindset… And Andy Frisella… Guys like that have helped me tremendously.

Joe Fairless: Andy who?

Ben Fredricks: Andy Frisella. Those guys have helped me a lot when it comes to getting my mind right. And then as far as any books – A Man’s Search for Meaning, or The Alchemist… Those are my two favorite books and they’re quick reads that I’ll go back to and read a day or two if I’m feeling like I need to pick up…

Joe Fairless: Now we’ll do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Fairless: Best ever book you’ve recently read, that you haven’t mentioned already?

Ben Fredricks: Well, right now I’m reading “Sell or be sold” by Grant Cardone. I’m thoroughly enjoying that… So that’s a good one.

Joe Fairless: Best ever deal you’ve done?

Ben Fredricks: I knew you were gonna ask me this question, and I don’t know if I could pick just one deal. It’s kind of like asking “Which one is your favorite kid?” I think I love doing a deal so much that I think my next deal is always the best deal I’ve ever done. I wish I could answer that more directly, but we’ve done so many this past year, and each one is like my baby, I feel like.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Ben Fredricks: I think early on we were so eager to sell a deal that we probably were negotiating from a point of weakness, and I knew what the property was worth, so I think that’s an area where I’ve vastly tried to improve. I think just being so eager to do a deal, a lot of times… I’ve probably left a lot of money on the table over the years, but that’s okay; I think in the end if people get a great deal, they’re gonna come back and buy some more.

Joe Fairless: I’ve heard some conflicting statements there… You said you’re getting better, but then you said it’s okay, because that’ll come back around…

Ben Fredricks: Yeah, I try to walk a fine line there, Joe, because I do want to make a good return on investment, I do wanna make good money, but I do wanna give somebody a great deal, so it’s an inner fight that I’m having on almost a daily basis. And you know what, I’ll tell you straight out – that’s kind of why I’ve put my partner in charge of the sales, because he’s a little bit tough as nails kind of guy when it comes to that stuff, other than me. He was in the auction business for 30 years, he’s heard and seen it all, so I say “You know what, why don’t you deal with most of that, and I don’t have to feel so bad about leaving money on the table?”

Joe Fairless: Yeah, we structure our company similarly… Because I have a similar mindset that you have, and my business partner is much better at negotiating than I am, because he’s just got a knack for it.

Ben Fredricks: It’s good to know your weaknesses sometimes, so you can focus on your strengths and then delegate out the things that you’re not so good at. That’s part of being in business, I guess.

Joe Fairless: Best ever way you like to give back?

Ben Fredricks: I’ve thought about that a lot this year, and one of the things that we wanna do is start to donate some properties. I would love to do that, so if any of your Best Ever listeners are knowledgeable in this area or run non-profits, I would love to hear from them. And then also, I love talking to new investors and kind of opening their eyes to the possibilities. My mentor and my partner is giving me everything without it costing me anything, and I know I have to pay that forward, it’s my duty. So I don’t wanna be the guru course guy; I would rather create a tribe of people that understand how to do deals, and then they can create a life for themselves.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Ben Fredricks: We’re branded pretty much the same around the web, so you can reach out to us at OdellBarnesREO.com. We’re at Odell Barnes REO on Facebook, and Instagram, and YouTube.

Joe Fairless: Well, thank you so much for being on the show and talking about the challenges you had at the beginning of your investing career in real estate, and then how you focused on the education, how you got in touch with your current business partner, and how you all are operating your business and how you structure the roles and responsibilities based on skillsets, as well as some specific resources that you’re using and have used, that have helped you out.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Jay is a very experienced investor, and he also is a real estate blogger. Over the last 12 months Jay has stepped his game up a bit and added 42 units total to his portfolio. That sounds like something any investor would like to do, so hearing how Jay has done it can certainly help.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

I have used him for both agency debt, help with the equity raise, and my consulting clients have successfully closed deals with Marc’s help. See how Marc can help you by calling him at212-897-9875or emailing himmbelsky@easterneq.com

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Jay Helms. How are you doing, Jay?

Jay Helms: I’m great, Joe. Thank you for asking. How are you?

Joe Fairless: I’m doing great, and I thank you for asking. A little bit about Jay, he started investing in 2006 with single and multi-family homes; over the last 12 months he’s added 46 units to his portfolio, and we’ll talk about that. He is based in Pensacola, Florida. With that being said, Jay, will you give the Best Ever listeners a little bit more about your background and your current focus?

Jay Helms: Yeah, so 2006, as we all now know, was the high of most of the markets. My first — well, it wasn’t actually my first purchase, but it was my first live-in flip purchase. I was a single guy at the time, thankfully, and now my wife eventually moved in with me and saved me from making some horrible design decisions… But we bought it at the high of the market, lived it in while we were flipping it, which basically laid the groundwork for what we’re doing now with two kids, so it makes it a little bit more challenging… But that was it, that was the first purchase, and then we kind of put a pause button on everything, just the way the market was going; we didn’t really know what was going on, and that property was actually in Birmingham, Alabama… And I like to call that my false start.

The true start happened in 2014. We had already moved to Pensacola, we had been down here for a few years, and we really started focusing on what the market was doing and how it was recovering… So we had held on to the house in Birmingham, we turned it into a rental property, we finished all the renovations that we wanted to do, and held on to it for a rental property. We held on to that thing for about ten years, until it was ripe to get rid of it.

We walked away with some equity, and then we took that equity and put it directly into some single-family homes down here in Pensacola. That has been our focus for several years, and then last year, about this time actually, we closed on a 42-unit apartment complex over in Mobile County, Alabama, with a couple of partners. That’s the big bulk of the 46 units in the last year, but it has been an interesting and a great learning experience along the way.

Joe Fairless: Yeah, we’ll focus most of our conversation on this 42-unit, but just so I am understanding correctly, because I was with you up until when you said you sold the one in Birmingham and put that into some single-family homes in Pensacola, because in my mind, properties in Pensacola are much more expensive than Birmingham… So what are the numbers on the Birmingham property?

Jay Helms: The Birmingham property we bought for 216k, we put in around 42k-45k in the rehab, and then we ended up selling it for 246k. So over that ten years that we had it as a rental property, that our equity was being built by the renters that were living there… So we took that money — and when you say Pensacola, there were some areas of Pensacola, just like anywhere, where you have luxury homes, and there are areas that are up and coming neighborhoods, that are going through some revitalization.

So we were able to take that equity and put it into some of those real niche, real small neighborhoods that were up and coming, if that makes sense.

Joe Fairless: Yeah, but I wanna make sure that I got the numbers right… You bought if for 216k, put in 42k-45k; using 42k, you’re all-in at 258k, but then you said you sold it for 246k?

Jay Helms: 246k, yeah. So on paper it looks like we lost money, and we did. That was a huge learning experience for us, putting ourselves through school on that one… And the main reason that I sold it – I started listening to podcasts, and trying to understand the buy and hold market, because fixing and flipping is the sexy thing to do, right? So that’s what we were trying to get into, and I was like “Well, what makes more sense for us is buy and hold… So let’s look at how this property in Birmingham is actually doing if we analyze it correctly, and Joe, what I came up with is that property, just because of where it was located and the rental rates, everything that was going on in that market, it was costing me several thousand dollars a month to keep it.

When I figured that out, I talked to my realtor and I said “Look, we just gotta get rid of it. I’ve got some equity into it now, I’m not gonna have to closing with anything… Let’s just get rid of it.” So I walked away from that property with about 41k in cash.

Joe Fairless: Okay, so 41k in cash, and then you used that as a down payment for a couple properties, or what did you do?

Jay Helms: So we took that and we actually found a foreclosure. It was a one-bedroom, one-bath house, we paid cash for it, and did renovations. We were all in with that one for about 30k, and that rented right away for $600/month, and it stayed rented the entire time that we had it.

This last February — I had some really great tenants in there, and I told myself and my wife, we talked about “Hey, once these tenants leave, let’s look and see if we can sell it.” Well, we tried that and nothing came about. Then a gentleman approached me; I guess he had been looking at the house and kind of watching it, and said “Hey, I really wanna buy this house from you. What will you take for it?” So we agreed on a price, the tenant is still in it, it’s still cash-flowing, great numbers – and when I say great numbers, this is cash-flowing $350/month from a cash-flowing perspective, after all expenses are covered… And he paid me 50k for it.

I was happy with the price, he was happy with the price, and then we turned it around and took that 50k and 1031-exchanged it into a fourplex.

Joe Fairless: Really?! You 1031-exchanged 50k?

Jay Helms: Yeah.

Joe Fairless: Wow… Into a fourplex! What are the numbers on that?

Jay Helms: The purchase price was 145k, rents are $550 for each unit. Tenants are responsible for all utilities, and it comes out cash-flowing about $600/month once all expenses are paid.

Joe Fairless: Did you have to put any money into it in order to get tenants to move in?

Jay Helms: No, it was fully occupied. This was what I referred to as the little yellow house, which is that 1-bedroom 1-bath house that we just talked about… It was an off-market deal; the fourplex that we purchased with that 1031 exchange was an off-market deal, and we came about the fourplex through our local REIA meetup.

Joe Fairless: How did that go down?

Jay Helms: Well, have you ever done a 1031?

Joe Fairless: Yes… Sorry, that was a very broad question. When I said how did that go down, I meant how specifically did you hear about it at the meetup?

Jay Helms: So with the 1031 you’ve got certain timelines that you’ve gotta meet, and I’d reached out to all the realtors that I’d worked with in the past, and some new ones, and saying “Look, guys, I’m under a 1031 clock. I’ve got to do something, otherwise I’m gonna be penalized pretty heavily…” and I could get anything. I kept getting listings from the MLS, and right now, especially for the Pensacola market, there’s nothing that meets our investing criteria.

Our local REIA has a closed Facebook group, and I just posted in there, I said “Here’s what I’m looking for. I am under a 1031 exchange clock. Let me know what you’ve got.” I got two or three people that responded immediately, saying “Hey, I’ve got this listing, I’ve got this off-market deal”, and this one had the best numbers.

Joe Fairless: Alright, cool. So now 42 units, with you and some partners… Please, tell us the story.

Jay Helms: So my main partner Tim Kelly and I met through one of the social media groups that focuses on real estate investing.

Joe Fairless: Which one?

Jay Helms: Bigger Pockets.

Joe Fairless: Okay, cool. I love Bigger Pockets.

Jay Helms: Yeah, those guys are great. So he and I met through there… Actually, we were linked up by a local realtor that had been talking to us individually and knew we shared some of the same goals, so we all went and sat down, and had some Mexican, drank some beer and started talking about how can we put a deal together.

Tim and I finally ended up working on a deal over in (again) in Mobile County, Alabama. It was a distressed seller; he’d bought it about ten years ago. He was an elderly man, he was in his mid-seventies; he was living there through the week, trying to self-manage, trying to do the maintenance himself, the lawn care himself, and the property was just in really bad repair. It had a lot of deferred maintenance.

We went through several months of negotiating with him, and then after we got it under contract for 700k, we started raising money. So we started reaching out, again, back to our local REIA group, and we partnered with two other members from our local REIA group on this deal and we all made it happen.

Joe Fairless: 25% across the board, or a different split?

Jay Helms: A different split. We basically split it up into class A and class B membership, to where class B membership are your asset managers, like myself and Tim and the two other members, and then the class A members are the money guys, who brought most of the capital for us to close.

Joe Fairless: Oh, okay, so you have three other class B partners, and then you have passive investors.

Jay Helms: Correct.

Joe Fairless: Okay. But in terms of the class B partners, you and the three other partners – is that 25% each, or how did you split it up?

Joe Fairless: I’m referring to the general partnership, how did you four split up the general partnership?

Jay Helms: 10% each. Basically, what we did is the class A members had 60% equity, class B members had 40% equity, and then we split that class B membership, since there’s four of us, we split it up 10% each way. So there’s four members total in the class B.

Joe Fairless: Okay, got it. But the only people in the class B are four people, so in essence you each have 25% of the general partnership. And then you have 10% of the overall deal.

Jay Helms: Correct.

Joe Fairless: Okay, cool. Got it. 700k purchase price… How much did you have to allocate for renovations?

Jay Helms: On top of the 700 we allocated 200k for renovations. That included a complete remodel of 12 units; there’s seven buildings on the property, so we painted the exterior of all seven buildings, we upgraded the playground equipment, which had been there I think since the property was built, in the early ’80s. We renovated the laundry facility with new equipment, we got new signage, repaved and restriped the parking lot… And there’s a fun thing about this apartment complex, Joe – we’ve removed a beehive… It was one of the unoccupied units – we’ve removed a beehive from this thing that was at least five years old.

Joe Fairless: Oh, my gosh…

Jay Helms: We had to hire a professional beekeeper to come in and take all this stuff out… But it was in the rafters of the ceiling; so you had to cut the sheetrock back, and once you cut the sheetrock back, the [unintelligible [00:13:46].01] in this thing was 18 inches by about 6 feet.

Joe Fairless: Oh my…

Jay Helms: But the cool thing is I grabbed a bunch of the honey when they did it, and packaged that up and ran it through some filters and cleaned it up and jarred it, and put some labels on it, and we gave it to all of our investors and partners.

Joe Fairless: [laughs]

Jay Helms: So I handed the jars over and I joking said, “Hey, either this is gonna be the most expensive jar of honey we’ve ever purchased, or consider this your first divided.”

Joe Fairless: [laughs] Oh, I love it!

Jay Helms: Everybody got a kick out of it. It was an interesting story.

Joe Fairless: Oh, that’s so great… I was gonna ask you some follow-up questions about honey and what you did with it, but you just rolled with it, you did all that stuff… That’s great! That’s awesome.

The $200,000 in renovations – you did a whole lot for $200,000. What was the most expensive item, and how much was it, if you can remember?

Jay Helms: The most expensive singular item was probably repaving, restriping the parking lot. That came in at about 25k. But individually, one of the things we ran into that we weren’t expecting, and that just didn’t show up during due diligence, was when we got in to renovate some of these units, we had a budget — there was a mix of 1, 2 and 3-bedroom units, so our budget was 6k for the one, 7k for two, and 8k for the three… We went over that budget; so we’ve had to really concentrate on finding better deals, and the parking lot was one of those deals.

The first quote I think we got for the parking lot was around 60k, or 62,5k. So one of our other partners said “No, that’s way too expensive. I’ve got this guy I’ve used before, let’s give him a call.” He came in and did with 25k the same job, and did a phenomenal job.

Joe Fairless: And what about painting the exterior of all the buildings? How much was that?

Jay Helms: That was around 22k… So it’s right there, closest to the most expensive. And probably why it’s not more is the bottom — so these are two-story buildings, and the bottom is brick, so we left that alone, and we just painted the top level.

Joe Fairless: For someone who’s listening and who has not put together a deal of this size, and they hear your story, like “42 units, that’s incredible! They’re doing this value-add business plan… They must be instant multi-millionaires as a result of the deal.” I doubt anyone’s saying “instant multi-millionaires”, but how much have you made in this deal, just to give a sense to the listeners of what’s possible when you do a deal like this?

Jay Helms: It is a value-add deal, so the first year we did not project to make any returns to our investors, and I’m glad we didn’t, because we haven’t… Yet.

Joe Fairless: You gave them the honey.

Jay Helms: Yeah, they got that, right. [laughs]

Joe Fairless: That wasn’t in the projections. You’ve exceeded expectations.

Jay Helms: Yeah… But our first year, as we were walking in, we knew it was gonna be a mess, and the property was only 50% occupied at the time… And these were not necessarily tenants we would recruit. So we knew as we were going through — and of course, you’ve done some of these, where renovations and upgrades always take longer than expected. That happened to us, for sure… And then also, we got rid of the bad tenants and we started getting great ones. And we also had a hiccup with property management. We’ve been through a property manager change in the last year, since we bought it. There’s been a lot of different things that came up, we’ve learned a lot, but we’re on a path now to hit those projections.

We’ve gotta do some additional marketing. The property manager we have now has done a great job; she’s born and raised in the area, lives there, is a broker in that area… So the word’s getting out that she is now managing that property, and she’s filling up units faster than we can turn them around… So we’re on a good path. We’ve hit our numbers according to our plan; I think everybody was hoping that we’d be further ahead, obviously, than we are right now, but the future’s looking bright, as they say.

Joe Fairless: Did you all have an acquisition fee, or anything like that at closing that the class B partnership was compensated with?

Jay Helms: We did. It was 2% of the purchase price, but what we did is we basically turned around and reinvested as class A partners, adding some additional funds.

Joe Fairless: Okay, got it. Cool. So you don’t have money in your bank account right now as a result of this property yet. You could have, but you reinvested that money from the acquisition fee into the deal, therefore you have no profit personally to show for it yet, but you’re working the business plan.

Jay Helms: Yeah, we are working the business plan… And if we are too far off in the business plan, I’d be stressed out a lot more than I already am… [laughs] But going back and looking at our deal package we put together and the business plan we had there and the things we wanted to accomplish in year one, we’ve done that. There’s some things in year two that we’re already ahead of, and the money is gonna come. We’re not necessarily worried about that.

Joe Fairless: What did the management company not do that you needed them to do?

Jay Helms: To be frankly honest, they needed to tell the truth. They were just not very ethical people, from where I sit.

Joe Fairless: And how did you determine that?

Jay Helms: Well, there were some things that came up, from move-ins and move-outs… Specifically when tenants moved out, they’d go back in and make sure the units were clean, and make sure things were happening… We had a little bit of a pest issue that we dealt with – that’s the biggest example I can share with you.

Joe Fairless: Okay.

Jay Helms: And there were certain things that came up… If a unit has been offline in this particular county for six months, you have to get a new inspection done, for a city inspector to make sure it’s up to code… So we worked with the city inspectors and said “Okay, what do we have to do to get the power turned back on in this unit?” and he let us know, we approved the quote; well, the maintenance man they had didn’t necessarily do — they tried to hide some things from the inspector…

Joe Fairless: Like what?

Jay Helms: Ventilation of gas appliances, strictly the furnace and hot water heater. At the city, the code is you’ve gotta have a ventilation pipe for each appliance… So what they did instead of running two exhausts through the roof, they punched a hole in the ceiling, ran two exhausts through the ceiling, and then tied them back together before they exhausted out through the roof.

The city inspector found it, of course… And we didn’t know this was going on, but when we found out, hey, we’re not passing inspection, and it’s been a few months, we were like “Why not?” and this is what was told to us.

Certain bills weren’t paid, things of that nature. They just weren’t very honest. And that’s on us. We should have done better due diligence when we were interviewing property managers to begin with.

Joe Fairless: And how did you initially find them, and then how did you find your current management company?

Jay Helms: As we had this property under contract, we started working through our due diligence items; I just googled “property management Mobile Alabama.” I started calling everybody… Where this property is located is North of the county, it’s almost out of the county, so a lot of the property management companies didn’t want anything to do with it, because of the distance.

When I say distance, it’s about 30-45 minutes outside of the city. But this one company, they convinced us they were extremely hungry, and promptly returned our calls if they didn’t answer right away… I guess in the beginning we were in the honeymoon phase, and then we got to know each other after we got married, and it was not a pretty picture.

And then the current property manager we have, she is actually a — I’m gonna get her title wrong, but basically she is a part of the economic business development team for that city. So through our due diligence process and trying to find out “Okay, how is the city growing? What’s going on? How is the school system?”, she was our main point of contact, and she knew this property… Obviously, as she’s lived there her entire life; she knew this property, she knew what kind of deferred maintenance was going on and disrepair, and she was excited about somebody to come on board and really ramp it up to what it could be.

So she was extremely beneficial and helpful throughout the whole due diligence process, and working with us… So we eventually just approached her. Her business has some property management pieces of it; none of it apartment complex related, but the relationship there is so good, and she appears to be extremely honest and helpful, that we just said “Hey, what do you think about taking it over?” As a matter of fact, she might have approached us about taking it over…

Joe Fairless: What is one question you would ask a future management company that you didn’t ask the first one?

Jay Helms: Tell me about your team on the ground. Who do you have that’s within a 5-10 mile radius of the property that we’re looking to buy?

Joe Fairless: So you’re looking for proximity of current team members… And anything else? Any one or two follow-up questions you’d have, whenever they talk about their team on the ground?

Jay Helms: Well, the team on the ground is “Who do you have? Who do you know? Who are your contacts?” but probably a more important question – I probably should have said this first – is what is your plan to increase occupancy? What is your marketing plan? We’re at 50% now, we’ve got some people that need to get out, we expect we’re gonna go down to 30% occupancy… Once those bad apples are out, we’re finished with renovations, what is your marketing strategy to fill it up, and how do you foresee that playing out? Can we do some of that before we’re completely finished with renovations?

Because when renovations are going on, there is a lot that’s happening, and without your finger on the pulse constantly, things are gonna get missed.

Joe Fairless: What’s your best real estate investing advice ever?

Jay Helms: Know your market. We started investing in Pensacola three years ago; it is not the same market today as it was three years ago. The prices are high, the rents are following… Between my wife and I, we look at probably two or three properties a week, if not daily. Our last acquisition was in May, and it was over in Mobile.

So I’d just say know your market, regardless where you’re gonna invest; spend some time understanding and learning, so you don’t get yourself in a situation like I did in 2006.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round? Alright, let’s do it. First, a quick word from our Best Ever partners.

Break:[00:24:21].21] to [00:25:09].01]

Joe Fairless: Best ever book you’ve recently read?

Jay Helms: Best ever book I’ve recently read… I’m gonna have to bring it up on my phone, because I just downloaded it. So I’m an audiobook guy; I spend a lot of time in the car… So The Go-Giver.

Jay Helms: It was probably the little yellow house that we were talking about. We bought it for cash for 30k, and everybody told me I was crazy… They didn’t know that you could buy houses for 30k. We turned it around and sold it for 50k. In the meantime, we made about $325 cashflow every month, for the few years that we owned it. That’s been the best deal so far.

Joe Fairless: What’s a mistake on a transaction you’ve made?

Jay Helms: Oh, man… [laughs] There are so many. I’ll give you a recent one. This fourplex that we purchased, that was off-market, I assumed – just because every other transaction I’ve done where tenants were already in place, that the rent rolls… So if you close in the middle of the month, that the new owner would get half the rent for that month already collected, and the previous owner would get the other half.

Well, in this case we closed toward the beginning of the month, and that was not part of the agreement. It was basically “Hey, you’re getting a great deal”– and I did. There’s competing properties in that area that are selling for 180k-200k, that are not occupied, that are in similar condition. I got a great deal for it. It was just one of those things – when we got to the closing table and we were looking at all the final numbers, I’m thinking “Wait a minute, where is the prorated rents?” and it wasn’t part of the negotiation, which I always assumed it was.

Joe Fairless: Best ever way you like to give back?

Jay Helms: Doing interviews like this. I make a lot of mistakes… [laughs] And I do blog about them. I haven’t had a chance to write anything recently, but I do blog about them at HelmsREI.com; that’s kind of where I put everything, so there’s that… I also have a Facebook group – Real Estate Investing for the W-2 Employee, because I think there’s a misnomer out there that you have to choose one or the other… That either you’ve gotta work, or you’ve gotta invest, and quite frankly, if you love your job, there’s no reason why you can’t invest also.

I like educating people, and it’s a little bit selfish, because the more I talk to people and the more I try to educate them, the more I actually learn… And I know that. So it’s giving back, trying to educate others to follow in my footsteps.

Joe Fairless: Well, you certainly educated a lot on this call, during our conversation, from the 10-year false start – there’s the title of the next blog article for you, “The 10-year false start” – to this 42-unit. The lessons learned on the 42-unit, from questions you would ask the property management company, to the type of clauses in the contract, with prorated rents, too. The good stuff, about finding a good deal, partnering up with people through Bigger Pockets that you met with, and other ways… And then I love how we got into the specifics of different renovation costs and you’re doing, and what was a certain price… And the beehive, too! How could I forget the beehive…? Giving investors honey. [laughs]

Thanks so much for being on this show, Jay. I hope you have a best ever day, and we’ll talk to you soon.

Dave has co-founded a property management company and has managed over 10,000 homes. His company is not a typical property management company, they strive to be better in all areas than other companies. They are even working on the technology side that is severely lacking in the property management space.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Dave Diaz. How are you doing, Dave?

Dave Diaz: Fantastic! Thanks, Joe.

Joe Fairless: Well, I’m glad to hear that, and welcome to the show. A little bit about Dave – he is the co-founder and head of operations for Great Jones, which is a property management startup. He is an expert in property management; he has bought, renovated, leased and managed over 10,000 homes. Based in Fort Myers, FL. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Diaz: Yeah, sure. So I was very fortunate to come out of the institutional world of high finance and land in the mortgage crisis as one of the largest auction buyers on the West Coast of Florida. We had just enough money, contacts to go really big in flipping. Then got swept up in the institutional aggregation of single-family homes; these big Wall Street groups, publicly-traded companies that bought tens of thousands of houses after the mortgage crisis, and that gave us a really good on-the-ground, but also a high-level experience in buying, renovating, leasing and managing thousands upon thousands of homes for really big money investors… But never forgot where we started with our own IRA’s and other people’s money, one or two deals at a time.

Joe Fairless: What’s your focus now?

Dave Diaz: Great Jones is a tech-enabled property management company. We could go into detail there, I’ll leave that up to you, but the reality is with property management and the execution of the income property investment is not the same as buying a public security. People forget that when you buy a stock, you’re buying the leadership of the company as well, but they take that for granted. When you buy an income property, unless you’re self-managing, you’re buying the execution of the person you hired to do that as well, and having done it with P&L responsibility for hundreds of millions of dollars’ worth of homes, we know it can be done better, more efficiently and just differently than the industry’s status quo, which currently exists to put more money in the manager’s pocket than the owner’s if things are left to chance.

Joe Fairless: Yeah, let’s definitely dive into that. One follow-up question about what you said earlier and then we’ll get into how you bring that value proposition to life with what you’ve just said… The big money investors, so the Wall Street groups, that were doing all those renovations, or that were buying the properties and you all were managing and doing the renovations for – what is the difference in the metrics that they look at, compared to a private individual that has a portfolio of, say, five to ten homes with you all?

Dave Diaz: That’s a great question. They’re gonna view a basket of homes very similarly to the way an apartment operator would view hundreds of units. So they’re talking about global occupancy metrics, rent increase down to the tenth of a basis point type thing… They’re really granular, because these numbers are spread across so many homes that the percentages become more important than the outcome of any specific asset… Whereas if we’ve got five houses and we take a big hit on something, it’s material; to them, it’s a rounding error.

At the same time, I think they can be a bit penny wise and pound foolish on the way in which they approach these things. Most of their decisions are built towards scale, so even if something is an investment decision that we would all agree we should do on this one property, they don’t typically have the bandwidth to administrate things that don’t follow the conveyor belt smoothly… So sometimes they have to opt out of really good deals that we would all love to have.

Examples of that might be buying a home that is older than their age limitation; a lot of the Wall Street firms won’t buy them older than 1990; some are even 2000+ now in terms of age… And most of them have cap-ex or initial improvement cost limits that might be in the 20k to 25k range, whereas if we bought a really hairy asset, that might actually be the one that has the most built-in equity when we’re done improving it as an individual investor; they won’t touch that.

The logic is sound – they’ve got an employee they’re trying to get to manage 25 rehabs a month, they give him one 100k project. If you’ve ever been on one of those, you know they become all-inclusive, and you can spend most of your week over there every week, and it just destroys the conveyor belt that is the aggregation process… So they really opt out of what might be some great individual deals.

Joe Fairless: And conversely, from the private side, the investor who has five to ten – what are some things that you’ve seen the larger institutions do that you think that an investor could learn a thing or two from?

Dave Diaz: So they do pay attention to broader metrics; I don’t get asked very sophisticated questions by most individual owners… It’s interesting, if somebody will ask “Am I occupied?” Like, they’ve got one house – to them it’s binary, it’s either yes or no; it’s 100 or 0. They don’t really care that the market’s 98.5% occupied, they logically only care that they’re empty.

But at the same time, if you’re empty and the market is 98.5% occupied, you’ve gotta ask yourself why. “Why am I the outlier?” So that’s one.

The other thing is they just standardize so much better. One of the things I learned early on, even in my own investments, and especially doing it for other people, was wherever possible and where rational, I standardize. Same flooring, same paint colors, same paint substrates… It’s this brand, this finish, this level… That way, if I have to go back in and touch up three years from now, I’m not repainting the whole property. You’d just be surprised how many people do one-off things that aren’t repeatable, and they spend a lot of money downstream on that item again… Like, “Okay, now it’s a full repaint, because I have no idea what’s on the wall.” Even if I think I know what the color was, I can’t remember exactly what brand and finish, and that doesn’t go well when you try to touch up that paint with something that’s slightly different. So that would be a big one – they standardize.

At the same time, I would say do it really logical; if I can get a great deal on a discount tile, and I only need enough for one house, probably not a big deal if I keep an extra case in case something breaks. But my paint I’m super-specific about, because I know that’s gonna go back in every house.

Joe Fairless: Now, talking about Great Jones and the opportunity you saw in the marketplace which led you to co-found the company… So what is it exactly that you all do for real estate investors who pay for your company services?

Dave Diaz: We are third-party property managers. Our mission is to democratize Wall Street level performance for main street investors. Someone that has three houses with us, the investor from Ohio that’s got three properties with me in South-West Florida – they’re paying the same price as a Wall Street level firm for an air conditioner. A guy who buys 10,000 air conditioners a year, I’m not giving the same price too on that equipment to this individual investor; we’ve essentially taken all the barriers down. You don’t have to own billions of dollars in real estate to get the same pricing.

I think there’s a couple of important trends that your listeners would wanna know about, given the state of the property management industry. If you’ll indulge me for a second – this is not a push on our product, as we don’t manage [unintelligible [00:10:24].04] but I think it’s things that people just don’t know. The industry is basically all utilizing six out of the box platforms; things like Propertyware, PropertyBoss, Appfolio, Buildium – you know the names… Those softwares have over the last several years more and more focused their revenue streams on taking the ancillary revenue that managers used to enjoy – things like online rent payments, application fee premiums… Those types of — we would call them junk fees, but they were [unintelligible [00:10:52].27] fees. Those are now going to the provider, not the manager.

So where Propertyware used charge you 50 cents for an ACH transaction when a tenant paid, and you might charge four bucks and you could pay for your really nice car with those transactions, now they charge five dollars and they get all five. I think it’s $4,95 when they process an ACH.

What that’s done to the management industry is it’s forced the managers to go deeper and deeper into the owners’ pockets to collect additional revenue. So jet fuel prices going up on the airlines – all of a sudden now you’re paying for luggage fees, and a drink costs twice as much, and all that stuff… So it’s created a junk fee fueled industry where there’s just a ton of misalignment.

So I was spending my weekend managing x thousands of homes, and I’ve got my buddies with 20 houses in Fort Myers calling me and saying, “Hey, I’ve got an air conditioning quote for some obscene number, from somebody managing a lot of homes.” And I’m texting them one phone number to call and they’d get it for half.

I realized, like “Man, this isn’t excusable. These people should know better.” If you’re managing a certain volume of homes, you either should know better or you do know better and you’re pocketing the difference… I don’t care why, it’s just inexcusable. That’s where Great Jones was formed.

We said, hey, this could be a much better experience for the investor if we align our interests, meaning I’m not having a good day making $1,000 on an air conditioner when you’re having a bad day and have to buy one. And if we create transparency by not having any junk fees and just posting everything that we’re doing in real-time, with actual receipts and stated pricing… So it’s a challenging industry.

The other piece that we’re seeing now is people are starting to take this out on the resident if they’re not going directly after the owner. A lot of owners are not aware that they’re taking out their quest for junk fees on the resident, which is really troubling… So again, to me it’s a misalignment. I saw a lease the other day where a third of the security deposit was a non-refundable administration fee to the manager. I guarantee the owner had no idea that of their $1,200 deposit, $400 of it was a fee to the manager if it ever had to be exercised. So they’re sitting there thinking, “Hey, I’ve got a month’s rent. This is all hunky-dory.” Really? No, you’ve got two-thirds of a month’s rent.

In the same lease there was a huge maintenance call charge. Every time the resident picked up the phone to report maintenance, they got charged $50 for the phone call. Now, if you get four months before move-out and you’ve got a shower that’s leaking just a little bit, but it’s not really bugging you, are you gonna pay $50 to report it? Remember, a good chunk of your security deposit is non-refundable already… Or you’re just gonna say “Forget it, man… I’m gonna let this thing leak”, and when the owner pays $2,000 or some obscene number to replace a shower that could have been done for $900, they don’t know the motivations and the contractual misalignment that led them to that place.” You didn’t have to have a rotted shower, but because they wanted to charge him to tell you about it, and because their deposit was mostly forfeit, you’ve landed here.

Joe Fairless: You mentioned that you all have stated pricing… So what is the pricing for how you make money?

Dave Diaz: Our fees are super-transparent, and I hope the industry goes this way for the sake of owners. We are a straight percentage of rents collected; no markups, no junk fees, ever. We’re super easy. You’re paying x%, and that is it. No if, and’s or but’s; you will not see another fee, and we’re not taking it out on the resident either. The only time we ever charge the resident anything is if they actually force us to incur a hard cost on their behalf.

So we just think there’s a place in here to be the good guys, and to make up the junk fees via scale.

A typical residential property manager has something like 50 units per full-time employee… So if you think about them paying that person 50k-60k/year on average, their base fees are wiped out by the cost of staff, whereas we can, through technology and through our past operating experience, improve on that employee-to-home ratio significantly, while not sacrificing service to the owner or the resident. If anything, things are actually cheaper, better faster, because we’re leveraging the technology to ensure that things are done, and done efficiently.

The other thing is our maintenance, and things like that… We don’t do self-performed maintenance; we’re not misaligned in that way. I’m never billing people for my time. But if you say “Dave, what’s a 3,5-ton horizontal install HVAC with a heat pump [unintelligible [00:15:19].01] ?”, I have that on a spreadsheet; that is a number. That is not “Oh, let me get four bids.” This is gonna be X dollars and Y cents, and that’s it, no if, and’s or but’s. And usually, that price for us is gonna be the same as a Wall Street firm, if not slightly less. Don’t tell anybody, but we pay less than most of the Wall Street firms for this stuff because we pay faster. So – same vendor, but my payment terms are twice as fast, so I actually get things cheaper than the guys who have 80,000 homes.

Joe Fairless: That’s good just to get the best pricing – pay a lot faster. In terms of the percent of rents collected, does that percent change based on the number of properties that you manage for that owner?

Dave Diaz: It does. So you should be looking for a reasonable hybrid, and also it would depend on the area. The percent of rent for Northern California, where the average rent might be or $2,500 or $2,800 is gonna be different than an area where the average rent is $900.

Joe Fairless: Sure.

Dave Diaz: At the end of the day, there’s a hard cost to administrating the time for those properties… So yeah, volume matters, volume with the owner matters, and average rent in the area is important, as well.

We also have a price cap where no owner ever pays more than $149/month for properties. Somebody with a $6,000/month property is capped out on that fee, because we just thought it was fair. There’s no reason that somebody with a penthouse — was it really worth $600 to collect a rent check? I wish… That would be fantastic for me, but we thought that it was fundamentally unfair and we just weren’t gonna do that to our customers.

Joe Fairless: And what’s the lowest amount that you collect on a property?

Dave Diaz: Our typical fees – and I think this is well in line with national averages – are between 8% and 10%. And again, it depends on the area, and the home price… What I think is important is — I’ve had several owners, and this is just so hard for somebody who’s not in the business to do… But I’ve had owners come to me with 5% contracts, and by the time we got to page four of reading the contracts, we realized they were paying something closer to an effective 20%, with added inspection fees and maintenance markup fees, and “Oh, you called me and I have to go to your house – that’s another $100 fee.”

And again, it kind of comes back to this, like, whatever you’re paying, the industry is trending towards this [unintelligible [00:17:30].08] and everytime I do something, I intend to then charge you for doing it, and we just felt like that was fundamentally wrong. In that case, your base fee should be zero.

In another world we didn’t feel like it was the right way to do it, but you could argue that the whole industry should be a la carte, and you should only get paid when you do something. We thought that would misalign; I didn’t want anybody saying “Hey, you made up stuff to do, so you could bill me”, so we went the other way, and we said “Look, it’s an all-in-one number, and we think it’s an incredibly fair number.” If we actually go toe to toe, I think it’s half of what most people are paying, regardless of the contract firms, when they add it all up.

Joe Fairless: In terms of the bulk pricing — I wrote “bulk pricing”, but I don’t believe you said that; you just said you get better pricing on, say A/C units and other things; I wrote down bulk… But one of the variables is based on the speed in which you pay the vendor whatever their price is. Does that mean that the owner has to pay that lightning quick, or do you pay and then the owner pays you back out of the rent, or some other method?

Dave Diaz: There are a couple things… When I look at vendors, I look at three things. I look at the size or type — so you’re gonna find basically three levels of this: the guys who are on the radio, meaning you’re paying for advertising, you’re paying for a salesperson, the person who show up to your house to [unintelligible [00:18:50].14] is not an HVAC tech, they’re a paid salesperson, getting a percentage of what they sell. Then there’s this building somewhere, with ten accountants, and the overhead associated with that. That’s your super-premium — I’m not knocking the guys at all, but the guys you hear on the radio, that are like owned by private equity companies and are national providers of these things.

Then your Benjamin Franklin Plumbings, your One Hour air conditioning – again, these are great retail firms; I’m sure they do a fantastic job, but that wouldn’t be my choice as an insider. You’re paying three people to get to the actual technician. We are looking at the layer where our typical vendor is gonna have 3-5 vans, a family member doing their accounting, and when you google their office address, it’s a house with three vans parked on the side. They’re licensed and ensured, but your overhead is zero. The person running that is in one of those vans. That’s to me the cheapest licensed, qualified human that you’re gonna get to do the work and do it well.

And then there’s the layer below that – I have people who are like “No, I’ll just pick a guy up at Home Depot”, and it’s like look, you can do that, but if they flood your house by hitting a pipe with something, who are you suing? That to me is unsustainable, unscalable, and I wouldn’t do that to anybody.

If your father-in-law wants to paint your house for $200, god bless him and let him do it, but I can’t do that repeatedly… So we find this happy middle ground. First, you know the type, then you’ve got to understand the part and labor cost. If ever in doubt, if you have no idea what you’re talking about – I’m really giving away my best secret here… Because I was a finance MBA; I grew up poor, but I didn’t grow up on a roof with my dad, or anything cool like that… I wish I could say I knew all this stuff when I started this, I just didn’t. What I was really good at was adding, subtracting, multiplying, dividing. I was on the math team, but I stopped at geometry. So I was a nerd, but a dumb nerd, if that makes sense.

So I would sit there and ask open-ended questions, like “How did you get to that cost?” There’s only two components – labor and material. Material, somebody will quote “Oh, this is a 0.152 millimeter flux capacitor” if they’re building a time machine. Okay, I google it while they’re talking, and I find it on HD Supply for $7, and they’re trying to charge me $200 for it. And then I say, “Well, okay, you’ve got a flux capacitor (or whatever you’re trying to sell me). How long does it take you about to install?” “Seven hours.” “Really? Because my resident said you were there for 15 minutes looking at this and putting in the part.” And then “What are you really an hour? What’s a fair price for that trade?” and you just build the price back that way. With Amazon and Google you can find darn near anything now instantly on the internet; you’re not searching through some trade journal.

Okay, you’re gonna be there for two hours. Fine. Let’s just say that’s the actual numbers and he’s not lying to you… You can basically build a reasonable cost. Fine, you’re an electrician, I’ll give you $100/hour, I know what the part costs. I’ll give you the part cost plus 20%.” You’ve now gotten a retail quote of $700 down to $250.

I had a guy in Chicago — I’d never laid foot in the city of Chicago, and I had a guy try to charge me $7,000 for a sewer lateral. This is a pipe that runs from the house to the street, right?

Joe Fairless: What should it be?

Dave Diaz: In Fort Myers I’m paying $1,300 for this thing. His excuse was the hole’s deeper and we use more gravel. Okay… So you’re digging 8 feet instead of 5, with the same [unintelligible [00:22:07].10] And then I’m like “So gravel here is $300/truck… How much gravel are you using? I’m still trying to get to the extra $6,000, if you’d just help me here…”, and he ran on a schema like $2,200. I said, “Fine, I’ll give you $2,200 because it’s Chicago, and everybody’s gotta pay the mob (or whatever they have to do to do business) [unintelligible [00:22:33].20] That’s insanity.”

Joe Fairless: What did he say?

Dave Diaz: He hung up on me, but I called three more guys, and somebody did it for my price. And that’s the other thing – you’re not crazy. I think people will tell you you’re crazy… When I landed on the ground in Indianapolis for one of my roles I didn’t know a soul there. I had literally 29 air conditioning guys tell me my numbers were fake, like I didn’t know what a Goodman costs from Goodman, even though I had a price sheet in my hand… And the “We teach our contractors to make money here, and nobody will ever do it for that price…” You know what, the 30th guy said yes. And then he introduced me to the plumber, and to the electrician, and to all the other guys that work in that ecosystem of licensed, wonderful humans, helping building their businesses. These guys have great lives because of the volume of work companies like ours can give them… But there’s an ecosystem of that; there’s an ecosystem of super-premium retailers, and there’s an ecosystem of wholesalers, just like if you think about retail, there’s a Nordstrom and there’s a wholesale guy with the stuff that falls off the back of a truck, right? Where are you shopping for your items?

Joe Fairless: This is great stuff. I love how you went into that in detail. What is your best real estate investing advice ever?

Dave Diaz: It would actually line up with a lot of this… I tell people two things – build your network, which has a lot of what we’ve just talked about, if you’re new to an area… And I’ll tell you, the second thing is diversify wherever possible. That can be done a couple of ways. If I’m gonna buy two properties, I like to be local because I’m in the business and I can touch and feel it. Another way to diversify is geographic – buy in three or four different locations, five locations across the country.

I personally don’t geographically diversify because I’m in the business and that’s what I do every day anyway; it might as well be in my backyard. If I wasn’t in the business, I’d buy in five markets, just to hedge risk.

Beyond that, I would say build your team. When I go into a place, whether it’s new or whether it’s local, once you hit a vein — it’s like mining a precious metal… Like that air conditioning guy; it took me a long time of prospecting, 29 calls, until the 30th guy is like “Yeah. You’re not crazy. That is what this stuff costs, we totally admit that. We’ll go do it for this.” My next question is always “Great, who else you’ve got?” and you’d be surprised – a good title agent, or a good investment salesperson, a realtor, they typically have a property manager, like us. When you hire me, you’re hiring my ecosystem. I just did all the work for you. I’ve got a title guy that will close for next to nothing, and we’ve got great salespeople; we’ve got all that stuff… Even though they’re not in our company, that’s our ecosystem.

You could start your vein of mining anywhere in that ecosystem; you’ve just gotta find one. So whatever you know the best, find one of those that you know is right, and then ask them who else they know, because they’re gonna connect you to the rest of your ecosystem.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Dave Diaz: I like Blue Ocean Strategy. That one has served me very well. Go where others are not.

Joe Fairless: Best ever deal you’ve done?

Dave Diaz: Crazy tax deed investment. We actually foreclosed out the bank’s second mortgage by letting the tax deed foreclose on something we already owned.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Dave Diaz: In that same deal, I did not title the repurchase of the asset in a new name, and the bank came looking for the excess proceeds. That cost myself $50,000 by not changing the name of something, because I was too cheap to call my lawyer and spend $300 to ask how to do it.

Joe Fairless: [laughs]

Dave Diaz: So I hit a grand slam – my partner and I at the time hit a grand slam and turned it into a double by not paying $300 for some legal.

Joe Fairless: Best ever way you like to give back?

Dave Diaz: I love widows and orphans, and we are very heavy on a personal level into Compassion International. I think that’s one of the greatest [unintelligible [00:27:20].24]

Joe Fairless: And how can the Best Ever listeners learn more about what you’ve got going on?

Dave Diaz: GreatJones.co is our website, and also hello@greatjones.co is our e-mail. I mean this sincerely, we are in the business of helping people; we’ve done this all over the place. If you have a question, or you just want straight-up advice – I don’t care if you’re in Seattle – if we have something we can offer you in terms of advice, we will give it to you.

Joe Fairless: Well, I enjoyed our conversation, that’s for sure, and looking forward to seeing how Great Jones continues to do what you all are doing. I learned a lot from you in terms of industry’s trends, as well as your approach for your business and in terms of the bulk pricing, or rather the things you look for in vendors and how you understand the parts and the labor costs, and then you reverse-engineer that… Fascinating conversation.

Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Pejman had a very interesting strategy flipping vacant lots, until banks refused to sell him property after they found out how much money he was making. He also had a unique way of looking at his money at a young age, he would not spend any money unless it was an investment that made him money. Pejman has a ton of tips for money, real estate, and business. You’ll want to hear this one!If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Pejman Ghadimi. How are you doing, Pejman?

Pejman Ghadimi: How are you doing, Joe?

Joe Fairless: I am doing well. You said your friends call you PJ, so I will call you PJ. Are you good with that? A little bit about PJ – he is a self-made entrepreneur, best-selling author and real estate investor. Three of his businesses collectively have grossed over 40 million in revenue annually. He’s got a book that recently came out, Third Circle Theory, which focuses on achieving a higher level of self-awareness and leveraging the power of entrepreneurship.

He’s now building and developing luxury properties. Based in Palm Beach, FL. With that being said, PJ, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Pejman Ghadimi: Sure. Actually, a big piece of my background is actually I’ve made my first million dollars quite a long, long time ago, when I was 22 years old, in real estate, and then ever since I just got addicted to business. I’ve built a lot of different companies, one of which is really well known, called VIP Motoring, which is the world’s first investment fund in alternative luxury assets. Then since then I’ve also launched Secret Entourage, Exotic Car Hacks and Watch Conspiracy – three very large online platforms that teach different aspects of entrepreneurship and luxury lifestyle.

Today I spend a lot of time just primarily kind of managing those businesses, because I have different line CEO’s that run each of them. At the same time I’m also building and really going into rehabbing really high-end properties that are about usually the 1.5-2 million dollar range, and ultimately just kind of taking as much time as I can trying to do that, along with all the thousands of other things that come through the day.

Joe Fairless: How did you make your first million as a 22-year-old?

Pejman Ghadimi: Well, it was actually flipping lots. It was actually a really interesting concept. This was pre-recession, back in ’08. This was in 2005. What I ended up doing is I was buying lots from some of the major builders without them actually knowing I was buying them. I used to live in Northern Virginia, which was in the Washington DC area, and it was a very booming market at that time. I didn’t know much about real estate or anything else, but what I did understand, because I was a banker at the time – I really understood the way people and the psychology of what people were buying and how they were buying it, and then I also understood how builders were indirectly extorting people by adding premiums to lots or land just because of demand.

So people would line up in the morning, trying to buy a property, so there would be like maybe 50 to 100 people lined up for 10 properties available… So builders would come out and literally add premiums on the spot to some of these properties. It would be like “Well, if you want a house, the next five have a 50k premium”, or “The next 10 have a 100k premium”, and so on and so forth. So they were really raking in the cash, coming up with these made up premiums.
So one of the things I did is I figured out the angle as to where people were gonna be going to be buying houses the following year, and I started going ahead of time and making deals with builders and developers who were gonna build these areas to automatically secure 4-5 lots. This was interesting for them, because I was willing to put deposits on lots that didn’t exist, and it was also good for them because it was at a time where there was no demand for their lots, because they had no models, and the market hadn’t caught up in terms of location, where those people were.

So my main focus at that time was just to secure as many lots as I could, and I would go community to community before houses were built and try to secure anywhere from 3-5 lots. Then I would show up when those communities got hot, about a year later, and still I was one of the first guys that was gonna get his units… I would show up literally with these 5k deposits on these properties and I would sell these lots as allocations right before they were due for auctioning, to people who were in line, willing to pay 50k or 100k premiums. And I would sell it to them for 40k, or 10k-20k below what the builder was asking.

So I was ultimately flipping 5k allocations for anywhere from 40k to 70k, without ever having to take out a loan on a property, or anything. I did this 72 times before they kind of caught on to what I was doing, and eventually they put my photo in the back of their buildings and none of these sales centers would ever sell me a property.

It was really fun, because the first time I walked in there and I saw my picture, I swear, I flipped so hard, because I thought maybe the FBI was looking for me, or something… I thought I was doing something illegal, so I got really scared. I ended up sending my mother in there to pretend she wanted to buy a property, to ask them “Why is that guy’s photo in the background?” They were like, “Oh, we’re just not allowed to sell them a property.” I was like [unintelligible [00:05:55].23]

Ultimately, that was kind of my first gig as a banker, that allowed me to really leverage perception and this idea of supply and demand, and make it work in my favor at a very young age.

Joe Fairless: How have you taken that approach, where you identified some demand, and you were able to be creative and resourceful enough to leverage that to profits? How have you taken that approach to your other businesses?

Pejman Ghadimi: Well, that’s actually the whole core of what my business VIP Motoring was built off of. You see, after my banking career — I was a very successful banker, and at 25 I got fired.

Joe Fairless: Why did you get fired?

Pejman Ghadimi: Because I was a prick. I was one of the youngest managers in the United States at 18, and by 23 I was an executive VP. That got to my head. I was driving a Lamborghini to work, and that wasn’t working very well for a conservative bank. I was very arrogant and very cocky in my approach… But I was very successful. I was very good at what I did, but I was arrogant in my unhumbled approach in terms of how I looked at my peers or other individuals who were above me in that organization. It got to my head, so eventually I literally just fired myself, thinking they would call me back and be like “Hey, come back to work. Don’t worry about it, everything’s good.” They never called me. So I literally walked out of a very, very good six-figure job, literally by just thinking I would get a call the next day, and it never happened. But after that career ended, I realized I would never be a banker again, because the odds of someone else hiring such a young banker — even though I had a track record, but I had a track record from the only bank that couldn’t back me up anymore…

So I decided to get into the field — I loved cars with a passion, and the recession was around the corner; I understood (to answer your question) that people were gonna look for other places to put their money during a recession, because as a banker, I understood that FDIC and also investments in stocks, mutual funds and everything were gonna go to crap during a recession… So I was like, “Okay, we have all this money in the market, and it needs to go somewhere…” What we do know about recessions is that luxury goods get really cheap, but they don’t necessarily lose their value, they just lose their perceived value because of the lack of demand and the high supply… Because the first thing you dump when you know a storm is coming financially are your toys. So I knew that cars, art, watches and things like that were gonna get dropped.

I had saved a lot of money, I had my real estate money, I had a bunch of really good saving strategies from my past, literally eight years of being all working (I put money aside), so I decided to go all-in and ultimately buy a huge inventory of exotic cars and luxury assets from distressed companies that could no longer carry the inventory. So I bought it extremely cheap, and ultimately, since I couldn’t sell it, because I knew the recession would last a couple years, instead I decided to create an investment model that would allow some of my own clients at the bank who were very high-end investors that had money and they were liquid and they wanted a vehicle to park it in – ultimately they parked it in these cars and watches that they would never take delivery of, but I would ultimately become a storage facility for. So out of that – it gave birth to the world’s first alternative luxury fund that is called today VIP Motoring.

Joe Fairless: It’s fascinating. How much did you have saved when you went on your buying spree of the luxury vehicles and watches?

Pejman Ghadimi: I had a total of 2.6(ish) in cash, and then my property was paid off, my personal cars were paid off, so I had more leverage there in terms of taking out more equity. I had that as a back-up and put all my money (2.2 million) in buying inventory.

Joe Fairless: What year did you buy the first car for this business?

Pejman Ghadimi: I already had cars. This was originally a side business before it became a fund; it was just a car wash, meaning I was just doing ultimately detailing and customizing because I had my own exotics… So I just evolved that business and I went into buying exotics from dealers who were distressed in late 2007.

Joe Fairless: Got it. You said you had really good savings strategies… What are some of those saving strategies that you used to get to that point?

Pejman Ghadimi: You mean in my past?

Joe Fairless: Yeah, you said you’d saved money, you said you had really good saving strategies…

Pejman Ghadimi: Yeah, absolutely. One of my things from a very young age is I never spent money, I always invested. What I mean by that is very different than what most people perceive that line to be. I didn’t invest in stocks, and all that stuff; that wasn’t what I mean. I look at every single item I’ve ever wanted in my life as a possible investment, and if it’s not an investment, I didn’t buy it.

Even when I made some money, I didn’t immediately spend my money, meaning I wouldn’t go on vacations, I wouldn’t go spending money in clubs, because those are things where your money disappears. When you go on vacation, for example, you spend $10,000 between your plane ticket, your hotel, your food and everything else. That money is gone by the time you come back. You have nothing to hold on to.

One of the ways I kind of entertained myself at a younger age, even though I wanted all the luxuries in life but didn’t actually want to spend money on them, because I understood the importance of having money, because I came from a very poor family, was the idea that I would only put my money in things that were investment vehicles. A car can be an investment vehicle – even though we’re taught that it’s a depreciating liability – if you understand the dynamics of how cars work.

If you walk into a dealership and buy a car like a Honda or Nissan or even Lexus, we’re gonna lose money because that little liability keeps depreciating over time even if we lease it and we’re ultimately paying to drive a car. On the other hand, if we put our money in a Lamborghini, for example, that new was $200,000, but we’re able to acquire it at $100,000, whose lifelong value will always be $100,000, we’re now able to park our money, and ultimately, even if we’re paying a monthly payment, we’re only paying into our own equity.

When we go sell that car five years later for $100,000, we just recoup our own money back. This is what I call the wealth transfer strategy, and it’s one of the big things I teach at Exotic Car Hacks and Watch Conspiracies – how to not spend your money but how to transfer your wealth into things that previously were known as liabilities but can be actual assets if you learn how to actually by them and acquire them.

Joe Fairless: What’s another example, besides the Lamborghini, that might be surprising?

Pejman Ghadimi: Let me give you a very simple example of a watch. I’ll give you one for men, one for women. So you can walk into a store like Macy’s and you can buy the nicest watch they have in their store for maybe like $1,000. You just spend $1,000 on a watch. Or you can learn how to buy the right Rolex (most people know what that is) and if it’s costing you 15k and you can acquire it for 6k, it’ll always be worth 6k. So you can literally buy that Rolex, wear it, and it may even go up in the course of the next 2-3 years, so you could actually get out of it making money instead. So you’d rather spend $1,000 or invest $6,000? It’s kind of that model.

For women, the same can be said for when you walk into a store and buy a Michael Kors purse for like $500 that has a worth of zero, or you go and actually find a Louis at 60% of its cost and it’s always gonna retain that 60% of its cost.

So you could literally wear your Louis and then sell it and get your money right back into the next item you want to buy, if you later decide you want a Birkin or something else.

Joe Fairless: So there are two keys to that approach. One is knowing that asset class, because you’ve got to know the Birkin versus the Coach versus the Louis Vuitton, and the second is buying it at a discount. So how do you accomplish both of those things?

Pejman Ghadimi: Well, there’s a couple of ways. In a simple nutshell, I teach it; that’s the easiest way to do it. I teach it in different courses. But for the normal consumer, you just start looking at supply and demand and the ongoing pricing of the market. You can even look on simple sites like eBay or online to see what the secondary market is selling things for, and then once you understand that — then the acquisition strategy is a very long conversation; I don’t know if we have time, but I’m happy to go deeper into it… But you can acquire these items at a fraction of the cost, and then ultimately consume them without losing your actual spent money.

Joe Fairless: So I totally understand now that you’ve described it briefly; I know you go more in-depth with your materials. One easy way is just looking on Amazon, seeing what those items are, what the pricing is… In terms of buying it at a discount though, what are some strategies that you’ve used to do that?

Pejman Ghadimi: Well, you wanna buy luxuries the same way that I set up my fund back in the day. You wanna buy luxuries from people who don’t want them. What I mean by that, for example, let’s say you’re buying a car – why would a dealer want to sell it to you way lower than its cost? That doesn’t make sense. But because the dealer’s job is not to consume a Bentley or a Ferrari or a Lamborghini, the dealer’s job is to turn over inventory… And whenever inventory – regardless that it’s in the handbag market, in the watch market or in the car market – is not moving, it’s costing the actual business owner money, because there’s money tied in inventory that’s not moving. And since luxury goods are not high volume goods, inventory still needs to turn over for some type of revenue to be created.

One of the things people don’t really understand is that dealers are dying to get rid of cars that aren’t selling on their lots. The big argument becomes, “Well, why would someone wanna buy a car that the dealer can’t sell?”, but the dealer doesn’t care what it sells; the dealer turns over inventory. The dealer is marketing 15, 20, 30 cars at a time, and you’re looking for one car. That’s the advantage of the person versus the business. The business looks at everything as a number, and looks at everything from the ability to just ultimately move it within a timeframe. If it doesn’t move in that timeframe, it doesn’t instantly change the marketing strategy, get better at it or anything, because it has too many variables to care for. It just disregards the item. By disregarding the items, it looks for an exit, and if you as an individual understand how to position yourself, you can become that exit for the dealership, for the watch store, for the handbag store and everything in between.

Joe Fairless: That’s fascinating. Now, you’re focused currently on building and developing luxury properties – is that correct?

Pejman Ghadimi: That’s one of my focuses, correct… Because the same way that I’ve just told you that I never liked to spend money – it’s the same exact thing. I myself love large homes and exotic cars and everything in between, so the way I kind of work is that every 2-3 years I ultimately either rehab a really high-end luxury property, or I build one from scratch and live in it within the first 2-3 years, and enjoy it; while I do that, I build another one and then transition into the next one, so that way I’m not only living completely free, I’m actually turning my own living situation into an income-producing opportunity.

Joe Fairless: Can you give some numbers or a case study on how you were able to do that and it works out financially?

Pejman Ghadimi: Yeah, of course. Let’s say, for example, you can build a home for $900,000, that appraises for 1.2, but you’re the builder, so you’re able to build it for less than that. If you can build it for less (900k), you’re building in areas where the market is shifting up. So that same home that I have 900k invested in, I’m living in that home; it takes about a year or less to build, but once I’m actually in it, I stay in it and ride the market up while I build my next one. So that home, ultimately its base value goes up to let’s say 1.1 or 1.15, which is only 150k-200k up, not a big deal, but what ends up happening is for me to live — I’ll use a million dollar property as an example; that’s roughly a $9,000/month mortgage, including your taxes and everything, in South Florida. So the cost of that for an entire year, for example, is roughly about 100k.

So if you’re able to sit in a home for that year [unintelligible [00:18:25].12] and you’re able to then – even if you have this mortgage payment or whatever it is – sell it for 200k more three years later, while recouping all the money you’ve paid on your mortgage or however way you structured it… If you have enough cash, then more power to you to be able to live without the actual debt or the interest… But the basic principle is that as the equity market moves up, the actual cost of the home is actually more, so even if you have fees or anything else, you’re able to every three years just keep shifting forward and getting ultimately your own short-term rent back by living there.

So you’re not only getting your surplus minus your fees, but you’re also getting the actual equity which you’ve paid back each month as you put money towards the home.

Joe Fairless: And what happens in a market that just takes a dive?

Pejman Ghadimi: You have to kind of stay current with what’s happening. The market doesn’t shift in an instant. What we see is we see indicators – especially because I was a banker long enough – of how shifts are happening, because markets change across the board. The housing market is connected to the car market, it’s connected to the luxury market – all of these things are interconnected. It’s also interconnected to the tax market, it’s interconnected to the supply and demand based on how many people are migrating into areas at any given time…

We can look at the government right now and see all of these new tax laws taking a toll on a lot of these really expensive to live in areas, like Connecticut, New York and Virginia, for example, and we can see that those states are now going to cost even more to live in… So you’re gonna see migration towards other states that are like Texas and Florida, as an example. So that’s why even the appraised values of properties are not going up at the rate that the demand is coming into the market, it doesn’t’ matter because demand, when backed by cash, pretty much avoids all appraisals or anything else.

So if you can pay attention to these markers and understand what’s happening, then you’re ultimately always staying one step ahead, and if you do see a trend that “Man, we may be getting a correction”, then you wanna correct yourself six months before the market corrects you.

Joe Fairless: What are some of those indicating factors that you look for?

Pejman Ghadimi: One of the things I look for is the law and its relaxed state towards banks. For example, right now I look at the huge influx of money because of the private sector being so much more freed… Meaning with the current administration not caring so much about limitations and basic laws around business, what it ends up doing is it just deregulates and frees these capital markets, which become ultimately very aggressive, greedy markets very quickly.

We’ve seen how the administration is pushing back the Dodd-Frank, which became ultimately the guiding principle on how banks were supposed to operate after the recession, because obviously, we’ve seen the huge disaster that was, and all the issues there… But yet, now they’re pushing it back, so we’re going to see in the next 6-12 months more stated income programs on loans…

We’re gonna see Main Street ultimately buying what Wall Street is selling. And whenever Wall Street does something and Main Street follows, when more of Main Street jumps on, that’s a trend that stuff is ending; not stuff is getting better, but stuff is about to change. So if most loans on the market start becoming stated income, and those relaxed parameters keep staying the way they are, it’s gonna cause a lot of the market to start being flooded with people who can’t afford what they’re getting on.

So the affordability goes up, but what’s gonna end up happening – the supply is not there. What ends up happening is the cost of everything keeps going up and keeps going up because the demand is there and the supply is not, but eventually, that meets a threshold where that doesn’t make sense anymore.

Joe Fairless: Based on our experience as an entrepreneur and as an investor, what is your best advice ever for real estate investors?

Pejman Ghadimi: Don’t be emotional towards anything you do. Look at everything as a number and understand that other people look at everything as a number, as well. I think the more you master the math and the less you worry about what is happening to you in that equation, the further you get in your endeavors… Because money is nothing more than a number. It doesn’t come with any emotions. People have emotions.

So if you’ve invested in a property and you’re in it an extra 50k and it’s just not there, don’t waste time trying to justify that emotional connection you have to that property; get rid of it, get out of it, because the equation never lies. Money doesn’t have an opinion, people do… So it’s important to just follow that trend.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Pejman Ghadimi: I’ll try.

Joe Fairless: Alright, I know you are. First though, a quick word from our Best Ever partners.

Break:[00:23:12].23] to [00:23:49].20]

Joe Fairless: Okay, best ever book you’ve read?

Pejman Ghadimi: The Alchemist.

Joe Fairless: Best ever deal you’ve done?

Pejman Ghadimi: In 24 hours I sold a watch that I bought for 30k, for 58k.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Pejman Ghadimi: I didn’t factor in the terms of the transactions as much as I got excited by the numbers on the transaction, if that makes sense.

Joe Fairless: Will you elaborate a bit on that?

Pejman Ghadimi: Yeah, so I accepted a loan offer, meaning that I accepted a repayment on a property that actually required not just cash up front, but also cash yearly… So I became kind of the investor in my own property, and that was a mistake. I had another offer that was less total, but all cash, and I should have taken that up front… Because sometimes when you tie yourself down and you don’t realize the opportunity cost of not the money – because if you have enough of it it doesn’t matter – but the time commitment and the mental commitment of still being invested in something is what I undervalued there.

Joe Fairless: I hadn’t heard it put that way in terms of owner financing, if we’re offering that… I’m glad you mentioned that. Best ever way you like to give back?

Pejman Ghadimi: Through all the things that I teach, which just has become my everything.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re teaching and what you’re doing?

Pejman Ghadimi: Everything we talked about, you can simply go to learnfrompj.com. It’s a simple site where you can actually access all of my books; I’ve written 12 books. I have a dozen courses, everything from luxury assets, to business, entrepreneurship and everything in between.

Joe Fairless: That sounds like a lot of fun, and some will probably open up the eyes on a lot of different aspects of what you’re doing, because you take a different approach than what’s typical, and it’s grounded in (from what I can tell) a lot of sound logic. If you had asked me prior to our conversation, “Okay, Joe, real quick… Lamborghini – asset or a liability?” [laughs] I would definitely have to say liability, but if we understand the market dynamics, as well as getting it at the right price and knowing how to do that, then certainly it could become an asset if you buy at the price that it most likely won’t go under, because then you’ve only got upside.

So thanks so much for being on the show… I’m really grateful you were on, I learned a lot. I hope you have a best ever day, and we’ll talk to you soon.

James was making good money as a W2 worker with benefits and a comfortable life. He looked into real estate investing, started wholesaling, did two deals, and left his job. His family thought he was crazy and so did his friends. Now with his company being worth multiple millions of dollars, clearly he made the right choice.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

List and manage your property all from one platform withRentler. Once listed you can: accept applications, screen tenants, accept payments and receive maintenance tickets all in one place – and all free for landlords. Go totryrentler.com/besteverto get started today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, James Hawk. How are you doing, James?

James Hawk: Good, man. How are you? Thanks for having me on.

Joe Fairless: My pleasure. I am doing well, and nice to have you on the show. A little bit about James – he owns and operates a multi-million-dollar real estate investing business in North and Central Florida. He’s been a full-time real estate investor since 2010, and has purchased over 1,000 properties. He’s bought and sold off 40 million dollars worth of real estate, and he’s based in Jacksonville, Florida.

With that being said, James, will you give the Best Ever listeners a little bit more about your background and your current focus?

James Hawk: Sure, sure. Primarily, we wholesale. I would say that our business is broken down into about 90% wholesale, 5% rehabbing, a little bit of wholetail, and then we also do a little bit of new construction, as well… But not that much.

Basically, I got started in 2010. I was working full-time for a bridge company. We actually did the Woodrow Wilson in Washington DC. We’ve been featured in Mega Builders, and a lot of other cool stuff like that.

Joe Fairless: Wow, cool.

James Hawk: Yeah, that’s pretty cool… But I learned pretty quickly that it was “Where am I really going?” I was making decent money; I wanted more out of my life. At the time, I had a friend that was a full-time real estate investor. He really wouldn’t share too much with me; I had just seen that he was successful and he was making a lot of money… And I said I was gonna be an agent.

So instead of going the agent route, I think it was on — man, you know back then… I know you were in the game as well probably, you couldn’t just go to YouTube and five million videos showed up, or anything like that… So what I did is I stumbled across I wanna say a blog about wholesaling. I think it was actually an REI club, or something like that. I had never heard of it before, and I just took the concept and basically just went out — I just went until I figured it out, more or less.

It was about 5-6 months before I actually did my first deal for $4,000. My second one was for 20k, and then I quit my job and went full-time.

Joe Fairless: Wow, there you go. You did some research, made it happen, and now here you are.

James Hawk: Yeah. I’d say everyone thought I was crazy, obviously… It’s the same story…

Joe Fairless: Who’s everyone?

James Hawk: My family, my friends… I wasn’t making a ton of money, but I had a regular middle-class job, good benefits and everything else. It’s just something that — I don’t come from an entrepreneurial family like everyone… They go to school, they get a good job, and they live out their lives. For me to do that, it was just a lot different than what I grew up around.

Joe Fairless: How old are you now?

James Hawk: 31.

Joe Fairless: 31. So how old were you when you left the bridge company?

James Hawk: I think I was 22.

Joe Fairless: You were 22 then… Were you married at the time? I don’t wanna make assumptions. No. Okay, I thought it was kind of young to be married, but I just wanted to make sure. Okay, so you weren’t married… So your family and friends thought you were crazy, because you left the decent salary job, as you said, and started your own venture. Now 90% of your business is wholesaling, and then you’ve got miscellaneous stuff… Why did you choose wholesaling over rehabbing, wholetailing and new construction? …the other aspects of the business you do, but not nearly as much.

James Hawk: Right, and what’s interesting – it’s kind of been a rollercoaster over the last 8 years, bouncing back and forth between “Alright, we’re gonna be…”– you know, I have a business partner, by the way, now. I didn’t at first, but since 2013 I have. But we went back and forth, like “Alright, we’re gonna rehab everything. Now we’re wholesaling everything.” We’ve gone through just the common hurdles that most people that have been doing this for a fair amount of time probably have, as well… Then we finally settled in the last couple years on the model that we have now, just simply because it’s just so much easier.

Anyone that has rehabbed a substantial amount of houses knows dealing with the contractors and just the invoicing and all that stuff is really a pain. There’s a lot of money in it, and we’ve brought people in-house, had project managers… We’ve done it a lot of different ways, but at the end of the day for our time and the lifestyle that we were looking to have in this business, wholesaling has just made the most sense for us.

Joe Fairless: I hear you. If I didn’t do what I did and I was still doing real estate, wholesaling would be the next option I’d focus on. The only reason I didn’t get into wholesaling originally is I didn’t really know about it… Otherwise I might be in it, because the risk per deal is, like, nothing… Right? You’re not risking your own money, so if you don’t sell it, then you just don’t sell it, right?

James Hawk: Yeah, and that’s pretty much it. That was a great point. There is, it’s very minimal risk. I will say this – we focus very, very much on customer experience and branding and creating that “We’re the authority” in any market that we’re in; that’s what we try to portray and we try to live up to it. We never try to put anything under contract that we don’t wanna close on or we don’t have the ability to close on… We always make sure that we can.

The only issues that we might run into every once in a while is that maybe one of our salespeople that gets the contract, and for whatever reason it just doesn’t really work – it’s rare, but it does happen… Then we usually use an inspection period and then we’ll just either have to back out or renegotiate.

Joe Fairless: Customer experience and branding is the focus according to you. How do you apply that and bring that to life?

James Hawk: Well, in a lot of ways. From everything that we do – from the marketing standpoint, from the time that we talk to somebody… We answer the phone first and foremost, always. We’re basically gonna make sure that they’re treated like family when they call us. That’s how everyone in here is. We’re really close, and we just do a lot of stuff that not necessarily every other company that wholesales would do. We’ll send them packages in the mail after the appointment, thank you packages… Just a lot of different stuff like that, that I’ve never seen anyone else do.

We have a charity program, it’s called “Houses Help.” If we buy your house, we basically will donate up to $1,000 to the church, or a charity of the seller’s choice. We have another move-in program… Just different stuff like that that really helps us stand out amongst everyone else.

Joe Fairless: The being treated like family part whenever they call you – will you elaborate on how that’s executed?

James Hawk: Sure. Let me say it like this – whenever they call, it doesn’t matter what they say to us… This happens all the time – they call from (let’s just say) mail, or whatever, and they’re super, super upset. We’ll just kill them with kindness until it turns around… And this happens, I’m telling you, probably once a week, where someone will call and they’re super upset; we’ll just focus everything on really digging into why they’re upset, trying to turn that around, trying to help them understand our position, and then basically getting that appointment and going out there and meeting with them. Once we do that, typically, at least 40%-50% of the time they’ll buy that house.

Joe Fairless: Yeah, there’s a difference between what I call the customer service smile, where it’s just fake… You’re calling with an issue and they’re smiling, but you know it’s just a front, versus what you said, where you’re asking questions to get to the root of why they’re feeling that way… And why is it? Why are they calling you super upset, by the way?

James Hawk: Just to echo what you’ve just said – that’s exactly right, and I should have said that… It’s being really genuine, as well; that’s another great point to that, just being really genuine. And I would say the only time people would call and they’re really upset is off of mail. We have a lot of different marketing channels – we do radio, we do mail, we do Facebook, Google… But the mail is the only time that we’ll ever get a call from someone that’s upset, and that’s simply because they go out to their mailbox every day and there’s 10, 15, 20 postcards and letters.

So even though we write all of our own and try to really stand out, at the end of the day some people just get frustrated that they’re getting so much mail… And then we’re just talking to them and letting them know why we’re doing that, and being genuine with them, and they usually appreciate that. Half of the other people, like they tell us, don’t even answer the phone.

Joe Fairless: Do you answer phones 24/7?

James Hawk: Not 24/7, but any time between 8 AM and 2 AM.

Joe Fairless: Oh, that’s pretty close.

James Hawk: Yeah, we’re close… Not quite 24/7, but yeah, between 8 and 2.

Joe Fairless: If I call at 1 AM, where is the person located who I’m talking to?

James Hawk: The person at 1 AM would be in the Philippines; that would be a VA. But we will answer the phone.

Joe Fairless: [laughs] Your marketing – you touched on it. You said customer experience and branding tend to be the focus… So we’ve just talked about customer experience… What about branding and — I’ll group in marketing there. You said radio, direct mail, Google… What else do you do?

James Hawk: We also do Facebook ads, and we’ve really spent quite a bit of money and really dialed in Facebook. Something that I hear quite often — I’m in a couple high-level real estate masterminds, and the common theme is “Facebook for motivated sellers is just very difficult. The lead quality isn’t that great, it’s really expensive…” And this is just every day, on average, we spend for a lead, let’s just say direct mail, $100 or maybe a little over $100 for a direct mail lead. On Facebook, we can bring in leads for about $40, so less than half of a direct mail lead… And typically, they can even be higher quality, because they’re actually taking the time to submit the form, and in essence, we’re kind of more in the driver’s seat versus with direct mail… They’re just responding, so that’s reactive instead of proactive.

Joe Fairless: What about radio? What are you getting per lead?

James Hawk: Well, radio is interesting… We’ve just started testing radio the last three weeks. We are getting calls. We haven’t got a deal off of radio yet, but we’re gonna see. We have a local, very popular DJ that’s endorsing us, and I’m curious to see what happens. We’re also gonna test TV, but the majority of our money goes into Facebook, Google, direct mail and relationships and networking.

Joe Fairless: What’s your cost per lead on Google?

James Hawk: On Google we stay around $175 or so for AdWords… The lead quality is always extremely high. What we do tend to find though is if you get a lead on AdWords, 9 times out of 10 they also went to five other sites, which we really don’t mind, because we go out and we have a full-blown presentation that we give them; we have a leave behind folder with a credibility kit we send them when we book the appointment… They’ll get a link that will show a video of who’s coming out to their house, with an introduction…
So we do all these little cool things that we really don’t see anyone else doing, that for us just seems like it’s business fundamentals.

Joe Fairless: You bring up an interesting point – I never ever thought about where it’s not just about cost per acquisition, it’s also about where those individuals are coming from, and if that platform lends itself to them also easily reaching out to your competition… And you mention that it’s not a big deal, but ideally, it would be nice if it was a platform that they weren’t naturally coming across your competition, right?

James Hawk: Sure.

Joe Fairless: That’s interesting, I’ve never thought about that. So you said 175 – I assume it’s 175 dollars, not $1,75, right?

James Hawk: Right, right. Yeah.

Joe Fairless: That’s what I thought, I just wanted to make sure.

James Hawk: [unintelligible [00:13:34].14]

Joe Fairless: So there comes my next question – with Facebook being $40/lead and you said it’s pretty high quality, why not just go all-in on the Facebook ads and not do direct mail, radio, TV or Google?

James Hawk: Well, I’ll tell you why, and that’s a very good question. The reason why we wouldn’t do that is just simply because we like to at least have a few lines in the water… You just never know. I recommend to everyone, make sure at least you have three or four marketing channels, just simply because you just never know what might happen. If something with that channel dies, or Facebook changes their algorithm, or whatever it is, that could really affect your business.

An example would be even direct mail. Back in 2011-2012 I felt like we were the only postcard or letter that these people were getting; it was very rare that we even had much competition at all, because things really hadn’t picked back up. But now – geez, every single day we go to appointments and there’s 30-40 postcards just stacked up on their counter, and that’s what my salespeople tell me all the time… But yeah, that’s why. I highly suggest that you just don’t have one resource that your entire business is depending upon.

Joe Fairless: Let’s talk about your team… How do you structure the team?

James Hawk: We have eight people now. We have two outside sales, we have one lead coordinator that’s during the day, and then we also have a lead coordinator/data specialist that’s at night. We obviously have my business partner, we have a full-time marketing person on staff, and we also have a full-time dispositions manager as well. I think that’s everybody; don’t tell them I said that… [laughter]

Joe Fairless: I think you got it. Your business partner – how do you divide up roles and responsibilities?

James Hawk: That’s a great question as well. What we do is we’re like “Look, you’re gonna focus on this side of the business, and I’m gonna focus on this side”, and we base that around what our strengths are.

My strength is more on the sales and marketing side, so that’s what I focus on. His strength is more on the going out and raising money, managing any construction… That’s what he focuses on. It’s a divide and conquer model.

Joe Fairless: Yeah, you complement each other.

James Hawk: Right, absolutely.

Joe Fairless: How did you meet your business partner?

James Hawk: We both had our own wholesaling business, and this was like at the end of 2012 – we just kept running across each other on Craigslist, looking at each other’s properties that were for sale, and then we’d call on them, not realizing it. After that happened like 3-4 times, we were like “Hey, let’s just meet up.”

I just happened to have a lead in a phenomenal area in [unintelligible [00:16:33].13] and I was like “Hey, why don’t you meet up with me and let’s take a look at this house that I think I’m gonna get.” So he met me over there, we walked the house… We just hit it off really well, our values aligned, and it just made sense. We made an agreement that it’s “Okay, I’ll go out and I will lock up this contract on this house. You go out and raise the money, and then we’ll just rehab this house together and see what happens.”

It was on a whim, to an extent, I guess you could say. And we did that house, and we absolutely crushed it. It was probably the best worst thing that could happen. We actually made over 100k on that house…

Joe Fairless: Wow.

James Hawk: …and that was our first rehab. We just happened to do it together, and it was the first rehab for each of us. Then we decided “Hey, why don’t we just partner up and do this?” $100,000 will get you really excited, so you’re ready to partner with everybody.

Joe Fairless: It does. Now I have to ask this question – you focus on wholesaling, but you made $100,000 on rehab, and that was how you and your partner did your deal… So why did you get away from rehabbing?

James Hawk: We still do…

Joe Fairless: But 90% is pretty — you said 90% is wholesaling, and 5% is rehabs.

James Hawk: It is. Well, here’s the thing, and this will put it in perspective for everyone… We actually make a good amount of money, even on our wholesale deals. Our average profit per wholesale deal is around 23k-24k. Obviously, every rehab can’t be 100k. We actually had two wholesale deals last year that were over 100k.

Joe Fairless: Wow.

James Hawk: So we just look at it as like “Okay, if we can make 23k-24k or whatever that is right now, versus maybe 35k-40k if we buy it and rehab it…”, that’s kind of the way that we look at it. If it’s substantially more, if we can at least double our money rehabbing it, then we will.

Joe Fairless: We’ve got to talk about these two wholesale deals last year where you made over $100,000 each. Let’s talk about each individually. Pick whichever you want first.

James Hawk: This is one before we had salespeople, at the beginning of the year. I think it was like February 2017. It was the Atlantic Beach, which is a highly desirable area; the seller called, I went out to the appointment, and he had literally stuff stacked to the ceiling throughout the entire house. His mother was living with him and she had just passed away, and he had some financial hardship.

I worked with him, I released some money early, helped him move out, and really walked him through the process. That deal – we actually sent out and it was within an hour we actually got over what we were asking for it. I wanna say we sold it for 272k, and we had it for 169k under contract. It didn’t close though for a couple months, but yeah, that was a good one.

Joe Fairless: How did you find it?

James Hawk: That one came from direct mail.

Joe Fairless: Okay. What about that other one?

James Hawk: The other one was actually direct mail as well. It was in another highly desireable area called [unintelligible [00:19:45].19] There’s like an equity membership just to be in there; I wanna say it’s 20k or 30k that you need to put up front just to live in that community… And we got a great deal on the house. From the hurricane, it had flooded it a little bit, and they had already relocated to a different location, so the house was just sitting there. This one was one of our salespeople.

By the way, we always try to get video testimonials, just because we love getting the social proof, and we love being able to show that to everyone else, and for anyone that’s skeptical, they can see that it’s real. So we also got him to do a video testimonial, but we also sold it to someone that lived in that neighborhood.

One of our buyers lived in there, and he was looking for another house in that neighborhood. We got it for 370k, and then we sold it to him for (I think it was) 483k. So the final check was just over like 101k that we made on it. He ended up buying it, and he fixed it up to live in it, and then he sold his other house in that same neighborhood.

Joe Fairless: Based on your experience, what is your best real estate investing advice ever?

James Hawk: The best real estate investing advice ever – I would say that it goes in line with marketing. Someone once told me always to be consistent, and don’t always make it about you. It’s always about what’s in it for whoever your prospect is.

Joe Fairless: That is so true, and in the world of social media a lot of people get away from that. There’s a lot of chest-pounding out there, versus thinking about how that content will be valuable for the people receiving it.

James Hawk: 100%.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Joe Fairless: Best ever deal you’ve done that you haven’t discussed on this show yet?

James Hawk: Best ever deal I’ve done that I haven’t discussed on the show – obviously, I would go back to that $100,000 wholesale deal, but I’ll tell you what, we’ve just completed a project… It was just a lot – we tore down the house, and it was actually a double lot. We’re gonna be right at $100,000 on that. It was minimal effort, minimal time, and it’s 100k, so that was a great deal.

Joe Fairless: What’s a mistake you’ve made on a transaction?

James Hawk: A mistake… [laughs]

Joe Fairless: You haven’t made any of those yet, have you?

James Hawk: Oh, man… I would say that a big mistake that you can make in wholesaling, that I’ve made so many times, is typically we use with a wholesale deal our buyer’s funds; now we always have our funds there, just to back it up… But before we didn’t do that, so if the buyer’s money don’t show up or they back out at the last minute, then you’re in a bad situation.

Joe Fairless: What happens if you don’t have money and they don’t have money, but you’re supposed to close? I don’t think I know that answer.

James Hawk: Typically, we always do have the money; it just might not be there at the time, or whenever we did it that way… If they fell out at the last minute, or the lender didn’t send their money or whatever the case may be, then now we’re scrambling, trying to go to the bank, talk to our lender or whatever we have to do to get that money over there.

So typically, we would just go to the seller and say “Hey, there’s an issue, but we’re gonna get the money over there as soon as possible. Work with us.” Luckily, it hasn’t gone severe, but that’s always an uncomfortable situation, and I would highly suggest — now, we always even have our buyer send in their money 24 hours in advance as well, just for a comfort level.

Joe Fairless: Best ever way you like to give back?

James Hawk: To our Houses Help program. That’s really cool, we love that.

Joe Fairless: What is it?

James Hawk: Like I said earlier, it’s the program that we offer to all the sellers.

Joe Fairless: Oh, sorry, yeah. If you buy the house, you donate up to $1,000 to charity… Or if you buy their house, you donate up to $1,000?

James Hawk: Yeah, of their choice. It could be a choice, a charity… Whatever they choose, then we would donate the money. And it’s at closing, so we show up on the HUD and they would see it happen.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you and your company?

James Hawk: You can find me almost everywhere @flipfuel – Instagram, Facebook, YouTube… @flipfuel, you can find me.

Joe Fairless: Excellent. And your website is linked in the show notes. James, thank you so much for being on the show, talking about your business focus, which is wholesaling, as well as getting into the details – I love it; you got into the cost per leads for Facebook ($40), direct mail ($100), Google ($175) and some pros and cons for each of those. You got into the team, and then got into two case studies for those 100k wholesale deals.

Thanks again for being on our show. Really valuable stuff for the listeners. I hope you have a best ever day, and we’ll talk to you soon.

Rod went from earning $10k in year two of investing to $120k in year three. He credits meeting someone who taught him about the psychology of success to making that jump. He then had a HUGE jump in net worth, jumping $17 MILLION in one year! But, it all came crashing down in 2008. Hear why he lost it all and how he has been able to bounce back stronger than ever in this episode.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Trevoris my real estate, business, and life coach. I’ve been working with him for years. Spots are limited, so be sure to apply today!

TRANSCRIPTION

Joe Fairless: Best Ever listeners, hello! Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is a show where we cut out the fluff and we only talk about the best real estate investing advice that moves your business forward. We’ve spoken to Barbara Corcoran from Shark Tank, Robert Kiyosaki, the author of Rich Dad, Poor Dad and many other successful real estate investors and entrepreneurs.

With us today we’ve got a very successful investor, both in single-family and family. How are you doing, Rod Khleif?

Rod Khleif: I’m awesome, I really appreciate you having me here, Joe.

Joe Fairless: Well, my pleasure my friend. In addition to him having owned more than 2,000 single-family homes and apartment communities, he is also a part of Tony Robbins’ team, and he goes to the Tony Robbins events, so we are kindred spirits on that level, that’s for sure… Because as you all know, Best Ever listeners, I am a huge Tony Robbins fan.

He is also the director of investments at MHP Management Group, and the host of a wonderful podcast titled Lifetime Cashflow Through Real Estate Investing. He’s also got an upcoming book coming out in a couple months, so stay tuned in there. He started a foundation called The Tiny Hands Foundation, which has benefitted more than 40,000 children in need. He’s based in Sarasota, Florida. With that being said, Rod, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rod Khleif: Absolutely. My background – of course, real estate. I immigrated to this country when I was six years old with my mother and my brother. We ended up in Denver, Colorado, where I lived for the next 30 years, and I got excited about real estate because I didn’t have much. I grew up with Goodwill clothes, and ate expired food, and drank powdered milk, because that’s all we could afford…

I know a lot of people had it harder than we did, but I knew I wanted more for my life, and I got my work ethic from my mother. I saw she worked really hard babysitting kids, and she bought the house across the street from us when I was 14 for $30,000. Then when I was 17, about to graduate from high school, she told me it had gone up in value 20k while she slept, and I’m like “What?! I’m getting into real estate. I’m gonna be rich in real estate.” So I got my brokers’ license when I turned 18, which you could do with education back then, you didn’t need the experience; you need experience now.

I made like 8k my first year in real estate, didn’t know what I was doing, made 10k my second year, but then my third year I made about 120k. So what happened between year two and three? Well, I’ll tell you – a couple of things. One, I got around somebody that taught me about the psychology of success, and how important mindset is to your success at anything. That kind of springboarded.

I was around this guy, I was dating his daughter, and he lived in an amazing house and stuff I hadn’t experienced before. He had really nice cars, they had a pool, they had a three-car garage… I had never seen any of this stuff before. And you know how when you elevate your standards when you’re around a particular environment for a while, you don’t wanna go backwards. That happened for me. Within a year of meeting him, I 10x-ed my income, I got a place to live, I got a Corvette… I was on my path.

But then fast-forward to 2006 – at that point I had owned over 2,000 houses, multiple apartment buildings, I had about 800 houses here in Florida, and several apartment complexes… My net worth went up 17 million dollars in one year, which sounds great. In fact, if you do the math, it’s $8,000/hour. Of course, I did that; my head got so big I barely made it through a room. I thought I was a real estate god.

Well, you know how when your head gets big, God or the universe has a habit of smacking you down? Well, that was 2008 for me. In 2008 my world crashed. I’m the guy that bought foreclosures, and I was in foreclosure on everything. I lost it all. It was a 50 million dollar seminar.

Joe Fairless: So from a tactical standpoint, what was the reason why you lost the 50 million portfolio? Was it lack of cashflow? Can you elaborate?

Rod Khleif: It was absolutely cashflow, and it was just the way my portfolio was structured. I had 800 houses two hours one direction and two hours the other direction, and everywhere in between. So it was much more logistically challenging to manage than having 800 units in three or four locations.

Also, I was up and down the coast, so I had to deal with flood insurance, wind insurance, which greatly impacts your cashflow, as well as taxes here in Florida are quite a bit higher than a lot of other jurisdictions, because we don’t have any state income tax. So all of that impacted my cashflow, and my model was such that I had to sell a house occasionally or refinance a house occasionally just to offset the little bit of losses I was taking cashflow-wise because of those reasons I just expressed, and also logistically it’s much more expensive to manage single-family properties if you’re in a big geographic area.

For example, let’s say you’ve got a maintenance issue. You send the maintenance man, he drives 30 minutes to an hour to get to a house. Because every house is different, every appliance is different, every HVAC system is different, every hot water system is different, plumbing parts are different, you can’t stockpile parts… So the maintenance man shows up, he assesses the situation, then he’s gotta go to a Home Depot or a Lowe’s and buy the parts, and by the time he gets back, maybe two and a half hours have already transpired. Then maybe he works on it, and as it happens very often when you’re doing a maintenance issue, as you get into it you discover you need more parts, so maybe he’s gotta go back to Lowe’s and Home Depot… So what would take 30 minutes if you had a stockpile of parts in an apartment community would take all day at a house. And when you multiply that times hundreds of properties, it has a huge impact on your ability to cashflow.

So that was probably one of the biggest factors, and I was in the C class properties, even C- in some of them… So when the market crashed, there was a lot of turnover, and turnover in houses is more expensive than units, for the same reason I just outlined – everything is different. So an average turnover on an apartment is typically in the hundreds; an average turnover in a house is usually 2k-3k. And when the turnovers magnified, you couldn’t refinance, you couldn’t sell…

When I went into 2008, I was at a 30% loan-to-value. I owed 30 cents on every dollar, so I thought I was golden… But I was focusing on the wrong thing. I needed to be more focused on the cashflow, which is why the title of my podcast is Lifetime Cashflow. Now, that’s why it happened.

I’m back now, but it was a painful seminar. I mean, I thought I was set for life. Maybe your listeners would like to know how I came back from losing 50 million dollars to the success I have today, because I think that could really help them, because it really was mindset. Mindset is, in my opinion, 80%-90% of your success in anything, be it this business or any other business. Would you like me to share that?

Joe Fairless: Yeah, absolutely. That’s what I want us to focus on for our conversation, so I’m glad that you segued… I just wanted to ask that follow-up question, just because I’m sure that a lot of the Best Ever listeners are wondering how that happened…

Rod Khleif: Yeah, it was because of all those things. Now, I’m not against single-family homes for cashflow, but my whole message is if you’re gonna buy long-term hold property, go multifamily. It’s just safer. If you’ve got a house and it’s empty, you’re 100% vacant. If you’ve got a fourplex, chances are if you’ve got a unit empty, you’re still okay. So that’s the message that I try to impart on people.

Now, don’t get me wrong… There’s lots of people doing well with portfolios of 20-40 houses, but I wouldn’t wish what I had on anyone. It would have been so much easier if I’d had 5, 6, 8 apartment communities, and I would have survived it, no problem at all. I would have flourished through it.

Joe Fairless: Let’s talk about the mindset and how you came back from that, and your approach. You said it was mindset, and your psychology. Now, when we saw each other at Unleash the Power Within, I was pleasantly surprised because I was talking to someone, you were talking to someone, and we just ran into each other, and it was kind of cool, because we hadn’t met in person before… You told me something interesting; you said – and fact-check me on this, because I don’t remember exactly what it is, but you said you had attended Unleash the Power Within a whole bunch of times…

Rod Khleif: I have been following Tony around the planet for 20 years, brother. I was on his team for 8 years, I’ve been to his resort in Fiji twice… Tony is the gift that keeps on giving, and let me give a shout-out to him; anyone that’s even considering going to see him, I’m sure you agree wholeheartedly, Joe, go see him. He’s fantastic. He’s impacted every area of my life.

Joe Fairless: But you went to the conference Unleash the Power Within. How many years in a row did you go?

Rod Khleif: I’ve done every one of his events numerous times and in fact, some of them dozens of times, because I was on his team. When you’re in the environment, it just assimilates into your mind. Frankly, I’ve seen it so many times I could teach it, but every time, every year you’re working on something new, you’re evolving. If you’re not growing, you’re dying. I was there with you whenever it was, because I’m constantly working on me, and it’s an evolution. There is no destination in your self-actualization, in your self-improvement. It’s an evolution. And again, if you’re not progressing, if you’re not growing, you’re dying… So I’m always working on different little pieces and tweaking different things in me to be the best version of me that I can be.

Joe Fairless: How did you approach, from a mindset standpoint, okay, your net worth and your finances —

Rod Khleif: Lost it all.

Joe Fairless: Lost it all, so now what?

Rod Khleif: Well, let me back up, because I think telling a little bit of my story would explain that. See, I was visualizing and manifesting the things I wanted in my life, not even realizing that’s what I was doing. When I saw that movie The Secret, read that book, then I realized I was utilizing the law of attraction. Some of you guys that are listening, if you’re analytical, this may sound foo-foo, but I promise you it’s real. So let me give you some examples in my own life where I used this – mostly car examples, and please realize this is not me bragging, this is just me sharing my story, because that’s really all I can share.

When I first got my brokers’ license, I had a 4-door Granada, this bone ugly grey car, because I thought you had to have a 4-door car to make money in real estate. And like I mentioned, I went and worked for my girlfriend’s dad, who had a Corvette, and he let me drive it. Once you experience something, you’ve gotta have it. So I put a magazine picture – this was way before the internet – of a Corvette on the visor of that Granada, and I’d look at it every day. Within a year, I had that Corvette.

This was back when Magnum P.I., a TV show with Tom Selleck was on the air. He had this magnificent red Ferrari 308 that I thought was the coolest thing ever… So I got a picture of that actual Ferrari and put it on the visor of my Corvette. Then in a year or two I had a Maserati that looked just like it.

And the last car example – and please realize, this is not me bragging, because this stuff doesn’t even interest me anymore… But the last example is I’m the guy that always wanted a Lamborghini, and I had the posters in my room, I had the bikini girls leaning over, washing it — you know, that’s me. Ironic is my son used to collect models of exotic cars; he had about 30 of them, and he had a model of the exact color and style that I ended up getting, a Lamborghini. So that stuff, that visualization really works, my friends, so I wanted to share that first.

I’ll give you the last example. The last example was I always wanted to live on the beach, and Denver has no beach, and I grew up in Denver, as I said, and I had pictures of palm trees… I got to visit Hawaii once or twice… “Man, I’ve gotta live like this.” So I ultimately built this 10,000 square foot mansion on the beach, with the boats on the back side and the beach on the front side, and I did it by visualizing it. So that’s step one.

Now let me share something I share with my coaching students, which is kind of a goal-setting workshop, if I can do it in two minutes… Most people spend more time planning for Christmas or a birthday party than they do designing their lives. So if you’re listening, even if you’ve written your goals down recently, I’m gonna suggest you do it again, under the framework I’m about to share with you. It only takes an hour. Pick a time when you’ve got a ton of high energy, whenever that is in the day for you. Make sure you’re hydrated, don’t do it right after you do a meal, and sit down and write down everything you could ever possibly want in life. The big things, the little things, the cars, the boats, the planes, the jet skis, the motorcycle, whatever it is. Take the lid off your brain, and imagine if you write it down, you’re gonna get it, because that is not outside the realm of reality.

What it does when you write it down is it triggers something your reticular activating system. It’s that filter in your brain that subconsciously points you in the direction that, again, your brain subconsciously thinks you need to be interested in. For example right now you’re listening to me, you’re not thinking about how your feet feel in your shoes. Well, now that I mentioned it, you do.

Another example would be let’s say you just bought a car; you never really noticed them before, but when you buy the car you see them everywhere. That’s your reticular activating system, and just writing down your goals triggers that. But write down everything you could ever possibly want, that’s step one.

Then also write down everything you wanna learn. Me, I wanna learn how to fly a helicopter. Write down who you wanna help. I’ve got my foundation, but what do you wanna do things for? I bought my parents a house. Who do you wanna help, in your family or in the community? Write all of this down, everything you wanna do, be or have. And then once you can’t think of another thing — by the way, if you’re analytical, don’t analyze it; you can always scratch it out later. Just keep writing until you can’t think of another thing.

Once you’re done, it’s not a goal until it’s measurable, so put how many years it’s gonna take for you to achieve each one of those goals. Just put a one, a three, a five, a ten or a twenty by each goal… Remembering that as human beings we will overestimate what we can accomplish in a year and massively underestimate what we can do in a decade. So put a number by each goal. Then that’s where most people stop, by the way. They’ll just write a few goals, a new year’s resolution, and then it’s forgotten in a couple years.

These next two steps are the most important. Pick your top goal, the one that juices you the most. Write it on a separate piece of paper. The one that if you got, it would just blow your mind if you were able to pull it off. Write that on a separate piece of paper. Then also pull out three of your top one-year goals. So you’re gonna take four of your goals and move them to another piece of paper.

Now, this is where the rubber meets the road, because the goal itself is never enough to keep you going. If I would have just focused on goals when I crashed and burned in 2008, I wouldn’t have recovered. It’s the “Why those goals are an absolute must” that will drive you. So take a few minutes and write a paragraph under each goal, why it’s an absolute must. Use powerful language – “So I can show my family what success looks like, so I can do whatever I want, whenever I want, wherever I want, with whoever I want…” Whatever is gonna joost you, you write that down, why it’s an absolute must.

But then also a little twist – put some pain in there. Put down “If I don’t achieve this goal, I’ll feel like a failure, or I’ll have failed my family, or I’ll have a life of regret.” Make it painful, because as human beings, we’ll do more to avoid pain than gain pleasure, so utilize that; use that pain to drive you, because you need something to get you up early to study this business, to keep you up late, to get you up when you had your nose bloodied and been knocked down like I was. This is what does it.

So you’ve got your goals, you’ve got your why’s, now there’s one last piece. Go on Google, find pictures that resonate with you, associated with those goals. You go on Google, you see a picture that kind of stirs you, it moves you, “Yeah, I like that one” – download them, go to Walgreens or CVS, have them blown up, put them somewhere you can see them. An incredibly powerful way to trigger your reticular activating system, even subconsciously. You won’t even notice them after a while, but your brain is seeing them.

I’ll give you one last example here of that dynamic. I use a paper planner, I’m a dinosaur. It used to be called a day timer, by FranklinCovey, and I still use it. And in the back of that thing I’ve got pictures that are in plastic, they’re dog-eared… They’ve been in there for about 19 years. The first few pictures are my gratitude pictures; they’re the pictures of my children when they were young, because everything starts from a place of gratitude. But then I’ve got pictures of the houses, the mansions, the places on the water; I live in an incredible compound on the water now. I lost that previous house in my divorce and all that debacle in 2008, but because God’s got a sense of humor, I can see it across the bay from the compound that I live at now… But the point is these pictures work.

In the back of this book that I was just talking about I’ve got the Lamborghini pictures before I ever owned it, and the Rolls Royce, I’ve got $300,000 worth of watches – things that don’t matter to me anymore, but I got them because I had pictures of them. So please don’t discount the power of that, my friends.

And one last piece on this goal-setting thing. In fact, it ties into Tony Robbins. I was floating in this pool of this 10,000 square foot house that I built, this magnificent home; there’s a waterfall going from the second-floor balcony into the pool… It had a $150,000 fish tank wrapped around the staircase… This home was magnificent. Three stories, wine cellar, elevator… And I’m floating in this pool, it’s changing colors because it had fiber optic lighting in it, I’m by myself about a month after I finished the house… I’m in the pool, it’s warm, moonlit sky, I’m looking up at this magnificent home, and I got depressed. I’m like, “What the heck is going on? I just accomplished this goal that I’ve worked my whole life to achieve. What’s happening here?”

And what I realize when I look back on it and I didn’t know it at the time – there were two things happening. One, never achieve a big goal without having other goals lined up behind it, because like The Good Book says, “Without a vision, the people perish.” So make sure you’ve got a vision for the future. I didn’t have a vision for the future, I didn’t know what I was gonna do next. So that was one component.

But the second, more important component, was as I’m looking up at this testament to my ego, this house I built, frankly to prove to the world I was good enough, I realized that my focus had been just on me. In fact, it cost me my first family. It’s embarrassing to admit, but it did… Because I was focused on success and focused on Rod. So that year I met Tony Robbins. And Tony feeds families for the holidays; he has fed millions of families, and that’s one of the things I love about him, is his heart.

So I decided to feed five families that year. This was 2000 or 2001, I don’t remember. I think it was 2000. But anyway, I fed five families. The third family changed my life. I went up to this house, and the lady came out and started crying when she saw the food. Her five kids came out, they all started crying, I started crying, and I was hooked. And I’m blessed to say – your statistic you said in my bio wasn’t quite accurate; I have now fed 60,000 children for the holidays. I have done thousands of backpacks filled with school supplies to children here in Sarasota and Bradenton; I’ve done thousands of Teddy bears to the local police departments for officers to keep in their cars when they encounter a child that’s been traumatized… It’s been the greatest gift of my life.

So my invitation to those of you that are listening – I know that you’re listening because you want financial success, whatever that means to you, but I’m here to tell you, I’ve interviewed billionaires and met mega-millionaires that are financially successful, that are unfulfilled and unhappy because they’re only thinking about themselves. So give yourself the gift of giving back in some fashion. It does not have to be as grandiose as what I’ve done or what some other people have done… Just do something for other people; incorporate that into your life and it’ll give your life a richness that’s much bigger than the financial success.

So there you have it, that’s how I got out of the crash in 2008 – I knew what I wanted and why I wanted it. I got around people, I joined Tony’s mastermind back then, I got around people that were making things happen… I’ve created my own mastermind to have thought leaders around me all the time too, and I hired a coach – it was a lot of money back them, it was like 5k/month, but that’s what I needed; I needed to focus on income-generating activity and knew I needed some tweaks, so I spent the money, I joined a mastermind, got some coaching and focused on what I wanted and why I wanted it, and I was able to pull out of it and thrive instead of survive. Hopefully that adds some value to your listeners, Joe.

Joe Fairless: Absolutely. The process that you walked us through is a process that I’ve done not in the exact way, but pretty much that way, and I’ve seen the results, that’s for sure. So let me make sure I have it documented properly, just to recap.

I love how you started out by saying most people spend more time planning a party than they do their life… So true. I think I’m guilty of that too, to — well, I don’t know; I don’t plan parties. But I get the sentiment, and I’m sure I’m guilty of that in some form or fashion. So one is write down everything you could possibly want in your life, imagine that if you were to write it down, it will happen. Two is write down what you wanna learn; three, write down who you wanna help, and then if we’re analytical, who cares? You can scratch it out later.

Then once done, put years to it, how many years you think – one, two, five, twenty, whatever, and then pick your top goal from that, write it on a separate piece of paper, then pick your top three one-year goals, write those down, and then write a paragraph about why are these goals an absolute must. As you said, use powerful language, plus put in some pain, so that we are associating both pain and pleasure; pain for not doing it, pleasure for doing it.

Then go find some images that associate to those goals, print them out – or what I do is I go on Vistaprint…

Rod Khleif: Yeah, that’s the best place.

Joe Fairless: Well, first I get the images on Google, I put them in a power point, I make a JPEG out of a PowerPoint slide with my images, and then I go on Vistaprint, I print a — I have a three foot by four foot poster on my wall in my office of my vision board, and it’s constantly there. I put it on my phone, I put it on my desktop of my computer, so it’s everywhere I go…

And then the other two miscellaneous components to it that are very important… One, don’t achieve a goal without having another lined up, and then two, have a give-back component.

Rod Khleif: Right. Let me add one more thing if we have time. The way to ramp this even more is to have a morning routine where you do a little light visualization. It’ll take me a minute to explain. Can I do that for you, Joe?

Joe Fairless: Sure, yeah.

Rod Khleif: So what I highly recommend you do – it literally takes a minute or two, (five minutes tops) is you just sit down and close your eyes, you can even do it in bed, and for a minute you think about what you’re grateful for, that you already have. I think about my wife, I think about my children, I think about my beautiful home, and just whatever I’m grateful for; my coaching students… But then I think about what I want in life as if I already have it, sometimes with emotion even. I’m grateful for what I want as if I already have it. It’s very, very powerful. It just takes two or three minutes, and then you just decide it’s gonna be an awesome day. That declaration typically makes sure that it’s an awesome day, because you’ve focused on it.

Doing that visualization as if you already have something – imagine you’re there, you’re in that moment, you’re proud… Who’s proud of you? What are you seeing? What are you hearing? What are you smelling? Just get as crystal clear as you can with that vision of the thing that you want as if you already have it, and I promise you it will drive you, it will pull you to get whatever it is you want. It absolutely works.

Joe Fairless: Rod, how can the Best Ever listeners get in touch with you?

Rod Khleif: So let me say this – I forgot to mention I’ve got a kick butt free 220-page book on multifamily investing, so if you’re interested in this space, you’re crazy not to take advantage of it. It’s no fluff, it’s like a textbook for this business. So get that, and that’s just by testing “rod” to 41411. If you like the psychology of success stuff, I’ve got a podcast, “Lifetime Cashflow Through Real Estate Investing” and I do one clip every week about the psychology of success, mindset, and then I interview people like you do, Joe.

And then my website, I’ve got a lot of free content on my website. Oh, I forgot to mention, I’ve got a kick butt Facebook group; we’ve got 5,500 people in it already. It’s free, and people are connecting all over the country and building little meetup groups and pure mentoring… Because you know, who you hang out with is who you become. So all you do is go to MultifamilyCommunity.com – it’s a direct link to that Facebook group. We don’t allow any promotion, it’s just for education and for people to connect with each other, and it’s going fantastic.

I was in L.A. picking a hotel because I’ve got a live event coming in April, and there were five guys I met with, my wife and I, that met on that group, and we connected via that group… It’s a great, free resource. And then my website has a lot, as well – rodkhleif.com. You can throw that in the show notes. This has been a blast, Joe. Thanks for letting me add value.

Joe Fairless: Yeah, grateful to have you on the show, Rod, again, and I’m looking forward to staying in touch, and we’ll talk to you soon.

Rick and his company invest in notes, often times the houses are owner occupied. When asked if they would like to stay in the home, most of the time the owners say yes. Rick and his team will work with them to create a new payment that works for them and gets them caught up on their mortgage.If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Rick Allen. How are you doing, Rick?

Rick Allen: Doing great, Joe. How are you?

Joe Fairless: I’m doing well, welcome to the show. I’m so glad to have you on the show. A little bit about Rick – he is the co-founder and fund manager of Cloud Capital Management and co-founder of PaperStac. Did I pronounce that correctly, PaperStac?

Rick Allen: Yup, you got it.

Joe Fairless: He has participated in 400+ single-family home purchases with a price of 25 million and a market value of 45 million – important distinction there. He has over ten years experience in real estate investing. He has conducted transactions with large A-list institutions, and you can learn more about him and his company at CloudCapitalManagement.com, which is also in the show notes page.

With that being said, Rick, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Rick Allen: Sure, absolutely. Originally, I was born in Columbus, Ohio. I’ve lived in Orlando, Florida for I guess roughly 30 years now, and I’ve always wanted to kind of help people out, so I went to school and was gonna major in pre-med, and quickly learned that chemistry and I didn’t get along, so I sort of adjusted my course there and ended up getting my real estate license after I graduated, and jumped into real estate. I started with a nation-wide wholesale firm, I guess it was back in 2005. I kind of learned the ropes of wholesaling houses; there was also an in-house hard money source, so it helped source not only deals, but it was sourcing money for some of the investors there…

Until 2008, when I started my own wholesale firm with a couple business partners, and went on to run that. We had multiple offices across the state and several employees, and wound up doing around 400 deals from middle 2008 until the end of 2011… At which time I sold off with another partner and we started just taking a run at just doing the fix and flips and building up our rental portfolio, until I guess in March or April of 2012 I had an REO agent call me and ask me an interesting question – they wanted to know if I would buy a mortgage note.

I’d always heard about notes a little bit, but never got into it, so I said, “Yes, sure, tell me about the deal.” It was a [unintelligible [00:04:47].14] duplex here in Winter Garden. The balance on the loan was $90,000, and I wound up buying it for $8,400. I got in and out of the deal in just under 21 days, and needless to say, I was hooked. So from there, my partner and I – we kind of did a full pivot into the mortgage notes space; we realized it was getting a little tougher to buy houses, to buy real estate, especially at the auctions, because a lot of the funds were coming in there.

So we directed all of our capital towards buying notes. After we did a handful of notes – maybe six to eight of them – we showed what we were doing to somebody, and he offered to give us a million bucks. From there, we started buying notes completely full-time, and have gone up to where we’re managing about six million dollars right now, and we’re in the process of doing our first offering, going to the SEC, doing a Reg A+ Tier 2, which will allow us to raise up to 50 million every 12 months.

That’s kind of a fast forward to where we are. We also have PaperStac, which is a mortgage note trading platform at its core. It’s a marketplace for people to buy and sell mortgage notes on a one-off basis. In a nutshell, that’s where we are right now.

Joe Fairless: Well, that gives us lots to talk about. Let’s see, the first very tactical question I have for you – you said when you were doing the note buying, you showed it to someone and then he gave you a million bucks to then go deploy that to go do the same thing with his money… How did you meet this person?

Rick Allen: It was somebody I knew that was a family friend. I went to school with his son and went to college with him at Florida. We had a really good relationship with him, and he knew what I was doing and he kept asking me, he’s like “You really gotta go show my dad, you’ve gotta talk to my dad about this. He likes to invest, he loves the real estate space, and from what I understand you’re doing pretty good.” I’d always been – from my wholesaling days, I’d been pretty meticulous about keeping spreadsheets and charting all the deals and the profits and losses and costs and stuff like that, so I already had all this stuff in the master pipeline, so to speak.

So I went and showed him what we’d been doing. We were there for about an hour, showing him the ropes, he asked a lot of pointed questions…

Joe Fairless: What did he ask?

Rick Allen: He said, “I’ll give you a million bucks; do you want it all today?”, and I was like, “No…” [laughs]

Joe Fairless: What type of questions did he ask?

Rick Allen: He was asking deal structure; if he gave us money, how we would structure the deals and what we would do. We wound up setting up and doing a partnership. We actually did an LLC and had a pretty extensive operating agreement. Then he asked other questions about my opinion on the market, on how I thought the deal flow is gonna come, were we gonna continue to get this pricing, how long was this inventory gonna be available… Pointed questions like that.

Joe Fairless: What were your responses to your opinion on the market and were you gonna be able to keep getting that pricing?

Rick Allen: Well, fortunately, I had just come back from a mentorship thing…

Joe Fairless: Which one?

Rick Allen: Eddie Speed at NoteSchool.

Joe Fairless: Okay. Yeah, I interviewed him on the show.

Rick Allen: I would tell all the Best Ever listeners that you’ve gotta get some sort of education. You’re gonna pay for it one way or the other. Either out of your experience, or you’re gonna pay for it by standing on the shoulders of others.

Fortunately, I had gone and sat with Eddie for quite some time and learned really the make-up of the market and what was really going on and where was all this inventory. There had been so many buzzwords around like “shadow inventory”, and I kind of finally learned about it and see how much of this non-performing mortgage debt was really untouched. I was able to answer the questions that he had, and let him know that I felt like – and this was back in 2012; actually 2013 – we’d have another 7 to 10 years of this inventory if nothing really changed as far as the economy, if the economy didn’t take another tank… Which you never know. If it does, I think that there has been this desensitization by people towards the foreclosure process, and people are looking around (I feel) and say “Oh, some stuff went bad, but people came out of it.” So if the market does tank, I think that you could possibly see another big wave of foreclosures coming, or a big wave of default debt, for sure.

Joe Fairless: Let’s talk about each stage of life you had as a real estate professional. First you worked at a wholesaling and hard money lending company. Then you started your own, from 2008 to 2011. You said you did about 400 deals. Why did you switch from that to going into fix and flips, and building your own portfolio?

Rick Allen: It was really a quality of life thing. It’s a blessing in disguise when you start getting bigger and you start creating a company and you start having an extensive amount of employees, because then you have employees, and with that comes problems… And there was some dissension within — we had three business partners, and it just felt like it was the right move. I’m a big fan of if you’re thinking about something, kind of put it out in the universe and see what happens and see where we wind up going with it, and if you push on a door and it opens, it might be a good time to walk through the door and see what’s on the other side.

And then just really wanting to build our rental portfolio, but also take some time and kind of figure out what my next step was gonna be, because I was getting to the point where I didn’t particularly see that the wholesale game — I thought that there was maybe a little bit of an end to it coming. When we’re at the auction and you see a lot of these larger funds, like Blackstone or what have you, that were paying at the time over retail for stuff, it was “Wow, the writing is on the wall.” If these guys are able to come in here, their bankroll is a lot bigger than mine; the margins just started getting a lot smaller, so to me it felt like it was the right time to make a move, to start changing and pivoting and start looking for that next opportunity.

Joe Fairless: From the fix and flips rental portfolio to then the mortgage notes, I imagine, especially in 2012, fix and flips were doing pretty good, and if you were acquiring stuff in 2012 — because it’s different in every market, but relatively it was still depressed a little bit in 2012… So why then switch gears again and then do the distressed notes?

Rick Allen: The real reason was because the speed in which we were getting stuff and able to turn it… When you get into the fix and flip stuff you start cracking open walls and start getting contractors in there [unintelligible [00:11:06].04] there’s just no telling how long you’re gonna be sitting in the house… And the market was good, but it hadn’t really exploded like it did in ’13 and ’14, and we were buying the assets that we were getting in 2012, notes that we were buying stuff for $8,000, $12,000 and we could just simply do more deals with the capital that we had at that time. We were getting in and out of them so quickly…

The first deal we bought we bought for $8,400. There was like $3,000 in liens, but we wound up getting a deed in lieu of foreclosure from the borrower, and we paid her like $100 or something. We put it on the market for 19k and it ran to 38k getting bid up. We were literally sitting at the closing table waiting for our collateral package to come in from the person we bought the loan from so we could close; it happened so fast, and every deal after that seemed to just keep dropping like that, so there was no need to fix anything up. We were selling stuff as is, and we were making better margins than we were by doing fix and flips, so it made more sense for us to make that pivot.

Joe Fairless: Now, fast-forwarding to today. You’re working on — I think I wrote this down correctly, a Reg A+ Tier 2 offering… What does that allow you to do?

Rick Allen: It basically allows us to start pitching people and advertising and marketing to raise capital. Anytime you’re gonna start raising capital, there’s a lot of rules you wanna follow, and this will allow us to raise capital from not only accredited investors, but also non-accredited investors. And it will allow us to raise 50 million dollars every 12 months, which is a lot of money to start playing with.

We were considering Reg. D, Reg. C offerings, and this one is very, very new. It was last year that you could start doing these, so we kind of hit the ground running and said “This is the one we wanna do.” It’s more expensive, but it’s worth the capital outlay just to be able to bring this investment to not only the accredited, but also the non-accredited, which is a big thing. I think a lot of times the non-accredited investor gets passed over and they don’t get to take advantage of ground floor hockey stick type growth curve on companies; they have to wait until something comes out to the public. So this was a real opportunity to let us forward our mission of saving as many houses as possible – or 10,000 houses – from foreclosure and keeping families there, but also to bring a really nice investment to somebody who maybe only has $300 or $400 to invest.

Joe Fairless: You said it’s more expensive, but it’s worth it. How much are you investing in getting this offering?

Rick Allen: Before we hit the advertising, which as you know, the advertising – who knows…?

Joe Fairless: Bottomless pit.

Rick Allen: Yeah, exactly, it is a bottomless pit. But we’re probably gonna wind up being somewhere around $85,000.

Joe Fairless: That’s not as much as I thought it would be. I thought it would be in the half a million mark, but I guess including advertising and stuff maybe you will.

Rick Allen: You never know how high we’re gonna get there in the advertising thing. We were fortunate that we went like one other fund, who we were kind of — we were like, “Look, we wanna model our fund after that fund”, and it’s somebody else who’s in the mortgage note space. We were fortunate enough — we talked to him and we have some working relationship with him, and we asked him who he used for his fund to put it together, and we went directly to that attorney, and fortunately that attorney was like, “Well, the road has already been paved. It’s gonna cost you a lot less than it cost to the gentleman who came before you.”

We were very fortunate in that, to have found an attorney who had done this exact fund and already kind of ironed out all the kinks for the SEC, so we’re hoping that remains true when we submit.

Joe Fairless: That’s outstanding, and for every Best Ever listener – and myself included – there is a tip there, that’s for sure. If we do anything with attorneys, then see who’s currently doing it as an investor, and ask them which attorney they used, and it very well could save you thousands if not tens of thousands, or in this case probably even hundreds of thousands of dollars.

Rick Allen: Yeah. He said it may cost us close to half of what it cost — it very well could have been a $150,000 transaction to get this thing up and running, just on the paperwork and the audits and everything that goes into it. So yeah, that’s a great tip for the Best Ever listeners to kind of take in and really marinate on that.

Joe Fairless: Absolutely. So you’re managing six million dollars right now, correct?

Rick Allen: Yeah, roughly, right around there.

Joe Fairless: About six million. And is that six million in investment dollars or is that six million in the value of the notes?

Rick Allen: No, that’s six million in actual capital.

Joe Fairless: Okay, six million in capital. Approximately how many investors do you have?

Rick Allen: We have a handful… Say, five.

Joe Fairless: Okay, so on average they’re North of the one million dollar mark.

Rick Allen: Yeah.

Joe Fairless: Okay. Of those five investors – and obviously I’m not looking for names or anything that would identify those individuals, but I’m gonna ask his question for the purposes of the Best Ever listeners who are looking to raise capital, and how to find investors for their deals… How did you get to know these five individuals?

Rick Allen: They’re all within our sphere of influence. We literally just stayed within our sphere of influence of people that we know. There’s a lot of people in my sphere of influence I haven’t gone and talked to, just because we didn’t want the capital or didn’t need the capital at the time. So I would say just start within your sphere of influence, start talking about your product.

One of the things that’s been very helpful is that we had already had, from the first time we talked to an investor, and certainly up until now, until the [unintelligible [00:16:52].06]

Joe Fairless: Track record?

Rick Allen: We had a working product, so to speak. We had a proof of concept that we could show, “Look, this is what we’ve been doing for the past year and a half”, or in this case in the Reg A+, “This is what we’ve been doing for the past five and a half years. Here’s our proof of concept, here’s our body of work, what we’ve done. This is what we’re raising the money to do, to do more of this.” So that always helps, if you can kind of show, “Look, I already have the experience in this.” It gets a little more difficult, I think, when you don’t have any sort of experience and you’re trying to raise capital. For me, I wouldn’t be able to raise capital right now and go buy, say, large apartment complexes like you do, because I don’t have that experience yet. So I wouldn’t wanna go out and try to do a syndication, because that’s not my world yet.

Joe Fairless: As far as this “all within your sphere of influence”, specifically how do you know — well, just pick a couple of them, maybe two or three of them; specifically, how was the very first time you met each of those three people; three of the five.

Rick Allen: Whenever we asked them for the capital… [laughs]

Joe Fairless: I know, but how did you get to know them before that, because you wouldn’t just go to some random person in the grocery store to ask him for a million bucks.

Rick Allen: Family and friends of the family.

Joe Fairless: Okay, got it.

Rick Allen: So they were very tight-knit into our sphere of influence. And then even people that are just outside that. People maybe I coached with on my son’s Little League team, who would ask what I do, and maybe I knew that they were a professional baseball and they had some extra cash laid around, or hockey players, or stuff like that.

Joe Fairless: Oh, okay. Cool. So we should all coach our son’s Little League baseball team, there we go…! [laughs]

Rick Allen: Coach Little League in Orlando, Florida. [laughter] My kid plays in [unintelligible [00:18:33].04] Little League, which there seems to be a lot of professional athletes that retired down here to Florida.

Joe Fairless: Got it. Let’s transition a little bit into a typical deal that you do. Can you describe it for us, please?

Rick Allen: Yes, absolutely. I guess I can kind of talk about where we came from when we were buying these, to where we are now. When we originally got into this, we were buying assets that we knew were vacant and the borrowers were alive, so that we could at least get a deed in lieu, and it was just a faster way, a better way for us to get cheaper inventory.

The longer we went on, we wound up buying assets that actually had the borrowers still living in the properties or the assets… So it kind of came to an issue, because we wanted the house back, but a lot of times we ran into — they don’t wanna sign the house over no matter how much money we were offering them, because they have what’s called emotional equity in there, and they wanna keep their house. It’s their shelter.

So once we kind of pivoted, we kept buying notes, but we started targeting owner-occupied loans. So now the typical deal for us is we’re looking for owner-occupied houses that are not really much more than three or four years behind on their mortgage; if they’re upside down, that’s fine. We love to get in there, and the first question we like to ask people when we get a deal is “Hey, do you wanna keep your house?” and the majority of the time the answer is yes, everybody wants to keep their house.

A lot of our borrowers have just gotten bad deals. They’d start filling out lost mitigation packages with the bank, and then the loan gets sold and they have to start all over, and it leads to a very frustrating experience when you’re trying to save your house. It’s like you take two steps forward and three steps backwards.

So we just ask that question, “Do you guys wanna keep your house?” If they say yes, then we start them on a trial payment plan immediately to say “Look, you’ve gotta give me some good faith money to show me that you can actually make these payments.” Then we start just collecting the loss mitigation package, which goes over their financials, their tax returns, stuff like that, so we can establish how much can they actually afford to pay. We give them a discounted payment plan upfront. We give them 70% of whatever they were paying to say “Here, just start making these payments.”

And the residual effect of being able to save somebody’s house has just been — not only are you making a really good return, you’re not spending as much money or foreclosures or deed in lieus, but you’re also able to save someone’s house. And there’s a family at the end of a lot of these loan numbers that people don’t realize that — there’s a lot of families that were affected by the meltdown, and it’s not just people with nefarious intentions who were not paying their mortgage… They’ve got hardships, and that’s gonna happen.

So we’re really proud and really happy that we’re able to start giving back and saving people’s houses and getting taxes paid for the communities, and just making a real dent in repairing the carnage from the meltdown.

Joe Fairless: What if their answer is “No, I don’t wanna keep my house.”

Rick Allen: Then we ask him, “Do you wanna sign over the house, so we can kind of tear this chapter out of your life? We won’t come after you after any past due money, we’ll waive deficiency judgment, and it that’s the case, we’re happy to give you some cash for keys money to kind of send you on your way. We’ll do what we can to help you find a new place.”

At the end of the day we wanna have a win/win, so if we have to take the house back, we’ll take it back. That’s a last resort. But if they don’t want the house, then they don’t want the house. We do what we can to help people out.

Joe Fairless: What’s the most challenging part of this process for your team?

Rick Allen: Breaking down the barrier somebody has when making their payment for four or five years, the prior investor who own these loans, some of their servicing companies just didn’t treat these borrowers with any sort of respect. I’ve heard some horror stories about people being threatened to be thrown in jail, or kicked out of their house… Just some terrible stuff. So breaking down that barrier to say “Look, we’re really here to help. We have your best intentions. We wanna do what we can to help you out and come up with a nice win/win solution.”

Joe Fairless: How do you build that trust with them, other than saying those words?

Rick Allen: One is we do what we say, but two – it’s amazing that if you call somebody… And we don’t do the loss mitigation anymore; we actually have a not-for-profit credit counselor who’s able to reach out to them, who does a fantastic job. And he’s able to just ask the question and listen. I think that’s the biggest key – you’re not learning anything if your mouth is moving. So if you’re able to stop and just take a breath and listen and be sincere and try to help these people out, that immediately is something that is not expected.

So you’re starting off the conversation with a curveball, because they’re expecting what the past four or five investors are doing, who comes in there with a sledgehammer that says “Either pay me or get out”, and “You’ve gotta pay me the full amount and you’ve gotta do it in 30 days, or get out.” So just by coming in there, getting them off-guard a little bit and saying “Tell me your story.” People wanna tell you their story.

Joe Fairless: What is your best real estate investing advice ever?

Rick Allen: My best real estate investing advice ever – I would say keep your head and kind of keep your pulse on the market. Don’t be so down in the deal, every single deal, that you’re not looking to see what’s going on. Just be aware of pivots in the market. You’re gonna have to reinvent yourself along the way. It’s part of it. And it may just be a little reinvention, or it may be a large reinvention.

Some of the stuff that we can kind of see on the horizon is there’s a big opportunity coming up in the seller finance space, where you’re doing owner financing. So that’s still in our lane, but we may have to just do a slight pivot, and that’s money that the fund — it still falls right in line with what we’re doing. So I would say just be cognizant of what’s going on around you and don’t be so stuck in a specific deal that you’re missing something, or an opportunity going by.

Rick Allen: Best ever deal would be we bought a deal that was a non-performing loan, we wound up getting — the borrower started paying; she had a hardship. We paid 12,5k for the loan and wound up getting 18k from the state to reinstate her loan, and then we wound up getting 24 months paid for her by the state on top of that, and then wound up selling the loan for like 35k. So that was a huge deal [unintelligible [00:25:51].06] It was just perfect.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Rick Allen: No doing enough due diligence on value.

Joe Fairless: Can you elaborate on that example?

Rick Allen: Sure. We did buy a loan — we did the high-level, we took the BPO that the seller provided. You should always trust, but then verify. We kind of did a lackluster job verifying and wound up buying a loan at close to par what it was worth, and it wound up costing us to lose some money whenever we got out of the deal. The value dictates everything. You wanna have a firm understanding of what the value of every asset you buy, because the value is gonna dictate where your price is gonna be.

Joe Fairless: What data point would you look further into if you had the chance to do that particular deal over again?

Rick Allen: I would look at value — price.

Joe Fairless: I’m trying to understand, to determine the value – what do you look at to determine that value?

Rick Allen: You have do your own BPO’s. Don’t necessarily take what the seller gives you. There’s one fund that we bought a lot of assets from, and their BPO’s magically come in at 130% of value, every single time. [laughter] So it’s a smack on my risk for not doing it. I know better than that, so… I would always say get your own data, get your own BPO, so that you know for sure going in there. It might not just be one BPO, you may order two, from two different people, just so you’re 100% if there’s something in question.

Joe Fairless: Best ever way you like to give back?

Rick Allen: We love to give back by saving people’s houses. There’s nothing more powerful for us than to give somebody the ability to keep their shelter and to keep their house, especially if there are kids involved… I love saving a home when there’s kids involved.

Joe Fairless: How can the Best Ever listeners get in touch with you?

Rick Allen: You can check us out at CloudCapitalManagement.com or PaperStac.com.

Joe Fairless: Very impressive what you’ve done, and I’m grateful that you took us through your progression and evolution as a real estate professional, from getting started and being employed, by wholesaling and hard money lending company, to now putting together a fun that has the potential to raise 50 million every 12 months. And the reality is right now you’ve got six million dollars that you’ve got under your belt, that you’re managing that money. That’s incredible.

Thanks for being on the show, thanks for talking about one of the main challenges that your team has, and that is, as you said, breaking down the barrier with the borrower, treating them with respect. And as you said… I’m sure there’s exceptions to this if we wanna really think about it, but I love the generalization – you’re not learning anything if your mouth is moving. I love that approach. Basically, we’ve just gotta listen. People wanna tell their story, so listen to them.

And then lastly, if you want to find a million dollar investor, then go to Orlando and coach a Little League baseball team. [laughs]

Thanks for being on the show. I hope you have a best ever day, Rick, and we’ll talk to you soon.

Ted lost everything early on in his real estate investing career. After that he wanted to find a way to continue investing in real estate, but minimize the risk. That’s when he discovered tax lien and tax deed investing. Now he still invests, but he also teaches others to do what he does. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

– Organization is the single largest “Source” of Tax Lien Certificate & Tax Deed Informational Products in the World– Has sat for more than 200 radio and TV interviews, most recently on ABC, CBS, NBC and Fox– Go-to guy when people want to discover how to invest in secure government certificates that pay 16% and 18%. – Based in Merritt Island, Florida– Say hi to him at:www.tedthomas.com– Best Ever Book: The Art of War

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluff.

We’ve spoken to Emmitt Smith, NFL Hall of Famer and real estate developer, Barbara Corcoran from Shark Tank, Robert Kiyosaki (Rich Dad, Poor Dad), and a whole bunch of others. With us today, Ted Thomas. How are you doing, Ted?

Ted Thomas: I’m doing fine.

Joe Fairless: Good, nice to have you on the show. A little bit about Ted – well, his focus is tax liens and tax deeds, and investing in them. He is based in — is that Merritt Island, Florida? Did I get that right?

Ted Thomas: You can sit in my swimming pool and watch a space [unintelligible [00:02:46].28]

Joe Fairless: There you go, that’s pretty cool. And you can learn more about him at his website, which is TedThomas.com; that will be in the show notes. With that being said, Ted, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Ted Thomas: Sure. My first career was as an airline pilot, then when I found out how much money I could make in real estate, well, I changed all that real quick and I resigned from the airlines, and I started a real estate business. I was in the apartment business to start with. With investor money, we built a business up to a round number – 200 million – and I was doing very well. Then along came 1986, and that was the first huge real estate recession in the country – they have one about every ten years – and it massively changed the market in that the market went down about 70% or 80%. I had 2,000 apartments in Phoenix, and another 2,000 over in California, and we went bankrupt, we lost everything. Everything.

From there I decided I was gonna get in a business that didn’t have a lot of risk, so that’s how I got into the tax lien certificate business and tax-default property business, and I’ve been at that for well over 20 years. I’ve been teaching it, and I’m a practitioner. I teach it all over the world; I teach it in Singapore, I teach it in Australia, all the provinces of Canada… We even do Bangkok [unintelligible [00:03:58].20] People there wanna learn how to do it too, because we teach them how to do it on the internet.

So that’s a great business, it always makes money, it doesn’t lose money, and it gets you out of the recession of real estate going up and down all the time.

Joe Fairless: Always makes money, doesn’t lose money – usually, when I hear that I wanna run the opposite direction because it sounds too good to be true… So help me understand that.

Ted Thomas: Good perception on your part. When they sell tax lien certificates — first all, here’s what a tax lien certificate is… Every property in the United States has a tax; it doesn’t matter whether it’s an office building, a home… Anything that’s real estate has a tax on it; it’s called a property tax. In half of the states if you don’t pay your property tax, they issue a tax lien certificate.

Let me give you some comparisons here now. Florida, when they issue tax lien certificates, they issue them on people that didn’t pay their tax. A certificate in Florida, if you go in and pay someone else’s tax, they give you the certificate; now you own a certificate on that property, and that’s a certificate that’s issued by the government, and pays up to 18%. If the people don’t pay the certificate, you get the property. If they do commit and pay their taxes, then you get all your money back, plus up to 18%. Texas pays 25%. A place like Virginia, they sell tax deeds… All different states. So different states sell either tax lien certificates, or tax-defaulted property.

If you’re based in Cincinnati, Ohio is primarily a state where if the people don’t pay their tax, what the state will do is they’ll tell the county, “Alright, we want you to confiscate” – that means they’re gonna seize that property and they sell it for starting bid, back taxes, with no mortgage.

So there’s two businesses in one – one is tax lien certificate. The only way you can buy a tax lien certificate is you give your money to the government, you get a check back from the government. That’s about as safe as you’re ever gonna get. The other business is buying tax-defaulted properties for 10 cents, 20 cents, 30 cents on the dollar with no mortgage. That’s what’s exciting for people. If they’re entrepreneurial, like your clients probably are, they wanna be buying tax-defaulted property; the starting bid is usually the back taxes. A place like Los Angeles will have 2,000 to 4,000 properties — just one county, not the state… They’ll have approximately 2,000 properties at every auction, all starting bids are at the back taxes. That kind of gives you a nutshell view of what that business is. It’s been around for 200 years. Anything that comes out of my mouth is 200 years old.

Joe Fairless: The 20%+ you mentioned Texas does – that is on a tax lien certificate? Is that correct?

Ted Thomas: It’s called a tax-defaulted property, and they issue a certificate. You actually get the deed in Texas, but it’s redeemable at the client. So you get a deed to the property, the client comes in and pays, they have to give you back all your money that you invested, plus 25%, and they have to do that within 180 days. If they don’t do it within 180 days, then you get the property.

Joe Fairless: Got it. All the money you invested plus 20%… Is that annual return, or is that in total, so if you have it for five years, then it would be five years divided by 20?

Ted Thomas: Well, you wouldn’t have it in five years. Every state’s gonna be different. I’ll give you some numbers now, but the only way you could learn this is you have to learn it state by state. Let’s stay with Texas, because you picked that one… Texas – they will issue a certificate that’s redeemable by the person that owns the property. So if I went in and paid the taxes on Ted Thomas’ house in Dallas, and I paid $5,000, then what would happen was I paid the tax, I got the certificate… Sometime in the next 180 days, it doesn’t matter which day, but any day they come in to pay, they have to give me back my $5,000 plus 25%.

Each state has its own rules, and that’s because when they first started the states with the colonies, and as they went across the country the states came at a different time… If you know Texas it doesn’t mean you know Florida; if you know Florida it doesn’t mean you know New York. People can buy these now — I’ve created courses… We actually could sit wherever you’re sitting now, in the studio or your kitchen table, we can buy it from there online.

Joe Fairless: What state offers the highest return on the tax that you pay initially for the person who’s defaulted?

Ted Thomas: The highest for a tax lien certificate is Illinois; they pay 3%/month, or 36% annualized.

Joe Fairless: So if you are an investor and you’re doing this, why wouldn’t you just focus on Illinois?

Ted Thomas: Well, you could if you wanted to, but people are provincial. They like to do things in their own place. People in Texas love to buy there, people in New York like to buy there… I just happen to teach all the United States, because what I wanna do is create home study courses where people in Singapore can sit on their computer and they can buy here in Florida.

I live here in Florida, and I like to buy in New York. I bought seven last year, and I’ll buy another six next month… So I buy there. But in New York they actually sell property. I’m an entrepreneur, so I wanna buy the property as close to back taxes, whereas a lot of people are conservative, which is good…

A conservative investor wants to start out buying tax lien certificates. So let me review that – the tax lien certificate, when you buy it, you give your money to the government and you’ll get your money back from the government, or you’ll get the property, one or the other.

Joe Fairless: And then the tax-defaulted properties, that’s where you go in the bidding process, and the starting bid is usually whatever the back taxes are…?

Ted Thomas: Right, they’re usually just the back taxes. And it’s always a bidding process. You have to bid on a tax lien certificate. Everything you have to bid on, because it’s a government sale; it’s always government.

Joe Fairless: So you bid on the tax lien certificate too, you said?

Ted Thomas: Yes, tax lien certificates you bid on, like a state like Florida… Florida, 18% is the maximum. Okay, so Joe wants to buy and I want to buy; we will both wanna buy the same thing. So it’s a shopping center, and the tax on it is 100k. So you say, “Oh boy, I wanna place 100k at 18%”, which will be a good percent when the banks are paying 1% or 2%. So you bid 18%. He says “I’m not gonna let him get it, I’m gonna bid 17%.” You get mad, so you bid 16%. Some people bid all the way down to 4% or 5%.

Joe Fairless: Okay, got it. And depending on the asset that’s [unintelligible [00:10:13].27], that would influence the bidding process, too…

Ted Thomas: Right, right. There’s literally millions of these. In the state of Florida they will have one million certificates every year. One million.

Joe Fairless: Going on that example with the hypothetical commercial property you referenced – do you have access to historical financials of the property when you’re bidding?

Ted Thomas: No. We have access to every property in the United States; in round numbers, there’s a hundred million properties. We have access to every one of those through the county. Our databases are set up, so using a simple thumb drive, we can plug into every county and that takes us to every property, but the property tax assessor – the only information they hold on the property is a description of the property, and then any liens or encumbrances on the property. They don’t put in any financial data.

Joe Fairless: And what due diligence do you do prior to making a bid? You can choose to answer that either with tax liens or with tax-defaulted.

Ted Thomas: Well, I’ll give you an example. Last week I was in New York and the particular county that I’m gonna go to – I won’t tell you that, because I don’t wanna create any more competition, but that county has 300 properties which they will auction in October. So I download all the listings so I can see them; in some cases, if the county is really up to speed, they’ll even have your pictures on there. Or if they’re using an auction company, they’ll have pictures. If they’re low behind, then they won’t have those. So I get that first, and then I choose the ones I wanna look at, and then I either go myself or I send my crew, and we evaluate every property before we bid on it. We’re not ever the high bidder, we’re always the low bidder. We’re really in a business, and that’s what we teach – we teach people to get an outcome; not get the property, get an outcome (how much money do you wanna make?).

So we look at all those properties. Of the 300, we’re not gonna bid on all of them, but we’ll bid on about 10% of those, and we like to buy at 20 cents on the dollar if it’s a nice colonial house, or something like that — I don’t know if you know… Well, you’re in Cincinnati, you know – big, four-bedroom, two-bath, on a couple acres; we’ll bid more on some of those, because we can tidy them up and put them back out into the market… But we usually sell to fixer-upper people. Our business is set up so we buy it low and sell it low. We really like to buy them, because we know how to do that. The marketplace does not know how to do that. 80% of the people at any auction have no idea what they’re doing. They’re just bidding… They think it’s gonna be a deal, they overpay… People don’t wanna get an education, they’re too lazy, so they’ll show up at an auction; if there’s 300 people there, 20% will be bidders, and 20% of those will know what they’re doing. So it’s kind of an unknown business. There’s a lot of secrets people just learn by studying, but they don’t do that.

Joe Fairless: Specifically you said you download listings, then you look at pictures if they’re available, and then you said you choose the ones you want to look at… How do you choose the ones you want to look at?

Ted Thomas: Well, you go through a process of looking at a lot of things. First of all, we’re gonna know the county a little bit – I won’t go through all that, but if the county’s got a massive out population and there’s a lot of poverty and they’ve closed down all the businesses, well that demographic and that psychographic is gonna make a difference.

For example, I like to buy within 150 miles of New York City, because that’s commute distance there. So I look at the county, I look at the property, and then I look at the marketplace around it; how many are for sale – that’s really easy to find out – and I look if they’ve got a brokerage community that is active or inactive, and then we get in a car and we actually go there and look at it.

In some counties, they’ll actually let you walk on the property; rarely can you get in. In certain counties you can get in the property, but most you can’t get in. A person needs to learn to keep their bidding low, because sometimes you walk in a property and the ceiling is caved in, or they’ve had a roof leak, or… As you know, in Cincinnati it gets cold, so places like anything North, if it hasn’t been winterized, the house could be ruined.

Like, I buy in Cleveland in Cuyahoga county – I’ve been in houses in Cuyahoga county that had a foot of ice in them; a foot. So you can’t buy that house. If you buy that house, you’re gonna have to tear it down.

Joe Fairless: So the way you could lose money is if you pay too much at the auction and you come across something like you just described, and you can’t sell it back – even the dirt – for what you paid.

Ted Thomas: Yeah, you shouldn’t pay any more than the dirt, or a little bit more. Now, I’m not a fixer-upper guy, so I’m gonna be super conservative and I teach that. The fixer-upper guys will buy those, they’ll drain all that water out of it, they’ll clean it out and dry it out and pick up those hard wood floors, but they’ll have to replace sheetrock and whatever, because water does a lot of damage if you have broken pipes and what have you… Especially if they’re upstairs and it drips down.

So the best way to explain it is it’s an abundant world; by that, I mean – most people don’t know this, but there’s five thousand tax auctions every year. Five thousand. I don’t think I’ve ever seen one with less than 25 or 30, but some have thousands of properties for sale. This is a big business, people just don’t know about it.

Joe Fairless: Why do you look for an active brokerage community? Is that for the resell?

Ted Thomas: Yeah, for resell. I’m looking for a brokerage community because I know enough ways to sell using Craigslist, eBay, and all the different electronic sites and so on. But the average person that I’m teaching to do it, they’re gonna learn the tax lien business, but their weakness is always gonna be — and I’ve been teaching it for 20 years, so I know that the weakness of the market is sales. They’ll buy right, but then they don’t know what to do, they make a mess of it, and they end up holding too long, and next year’s taxes come, and then people get in the house and do more damage or whatever… So I’m always looking to see if there’s [unintelligible [00:15:45].21] on the market last Saturday, and it’s only one of 27 in that part of the county, in that township; it’s one of the 27, and there’s 72 brokers. I love it, I love it!

Joe Fairless: Wow. You mentioned the last part of the process is to evaluate the property before you bid on it, and you bid on 10% of them. What about those 10% from a numbers standpoint? Is it they’re all 20 cents on the dollar, or is there something else on top of that?

Ted Thomas: There’s quite a bit on top of that. First of all, when I say I’m gonna try to get 10%, if I look at an auction list of three hundred, I’m probably only gonna choose about 30. You don’t wanna try to choose everything on there, you’ll never get anything done. My point is it’s abundance; there’s gonna be too many.

The amount of properties available are way too many. You cannot handle it, and if you’ve got hedge fund on there, they can’t handle it; there’s too much there. So I narrow it down to what I think is gonna be the best ten that I can resell. I’m only interested in reselling. I don’t buy them to rent them, I wanna resell. So I only look at properties that I know I can resell, and then if I’m gonna buy that property, and it’s worth in the neighborhood of a 400k, a 600k, and now I’ve got this auction property… So I look at it and I say, “Will that thing bring in somewhere around 400k?” If it would do that, do I wanna bid 10%? Sure. Will I get it? No, because there’s gonna be someone else savvy enough to bid more than that. But I know from going to auctions for 20 years very few people will bid over 50k for anything, and it’ll be down to two people in the room when it gets to 100k, so I’m prepared to go to six figures, because if I can a $400,000 house for $100,000, I’m buying it right now.

Joe Fairless: How does the process work when you’re doing the bidding? Does it vary based on county?

Ted Thomas: Most of the properties — on tax liens there’s over 100 different ways to bid on tax lien certificates. Some of them are up, some of them are down, some of them are sideways; sometimes it’s percentage of property. But tax-defaulted property, that’s what the entrepreneurs want – property that they can get cheap. That’s generally starting out real close to the back taxes, and then it’s just a battle of who’s gonna do a good job, or what you ended up in the auction round.

Now, if there’s three or four hundred properties, I can tell you it’s probably gonna take a good auctioneer two days to get through it. So the first day — simple strategy, you’ll figure this out in ten seconds… Everybody’s crazy to buy on that first day, right? And then the second day nobody’s there. So you’ve gotta have some staying power, you’ve gotta say “Alright, well that one came up first, so I probably won’t get it, but number 72 I’ve got a good chance…” It’s not like betting on horses, but you’re getting the idea. You’re gonna have to think it out. We have auction classes that last three days; we’re taking people all the way there. Now, we can’t be in the auction room when they’re bidding, because the county [unintelligible [00:18:32].25] won’t let us, but we teach them how to do that before we go. They practice in a room, in a hotel, they practice all that, and then they go there, and — we’ve had people six of them go, and six of them get a property; now, that’s the best. We’ve also had six of them go and none of them got a property… So you get the idea.

Joe Fairless: Based on your experience in this space, what is your best real estate investing advice ever?

Ted Thomas: Buy low and sell high, that’s easy.

Joe Fairless: Well, you buy low and sell low, though. I do, because I have a different strategy; I’m a strategist, I figured that out a long time ago. I wanna sell to all the guys that are on your podcast. They wanna go fix it up, they wanna go do all of that stuff; I don’t wanna do all of that. If I have to — I don’t wanna hire the crew; I just wanna get in and get out. I wanna be in the knowledge business, that’s what I wanna be in.

Joe Fairless: To buy low and sell low… Can you give us an example of just some numbers on a deal that you did recently.

Ted Thomas: Sure. I won’t be exact, but I did two in Albany, New York, this year. First one had a 140k value; that was a tax assessed value, because no one will believe a broker, and no one will believe you and me, so… The tax assessed value was 142k or something like that. We went in, we cleaned it out… There was bears on the property, there was deer, whatever… It took a couple weeks to get the electricity on and make sure all the plumbing was okay, and we sold it for 71k or 72k. That was half, so that gave the fixer-upper guy plenty, and I paid 38k for it.

Joe Fairless: And how long of a turnaround was it?

Ted Thomas: It probably was five months… In New York you have to wait three months to get the deed. You’re working with the government, so you can’t go in and say “Give me the deed!” In Texas they give you the deed right now, at the auction, but every place is a little different, so don’t hold me to exact anything on the call, because I can only recite the states that I’m in buying.

It’s not difficult, because when you wanna buy, it’s the government, so they disclose everything. An auction brochure will have 35 pages, 40 pages, and all the disclosures.

Joe Fairless: What’s the most challenging state to do a transaction in?

Ted Thomas: New York.

Joe Fairless: And why is that? Not from a political standpoint, but what specifically makes you say that?

Ted Thomas: It’s all political, because New York is over government; they have a state government, they have a county government, and then they have a township government. Everyone of those is a tax, so keep that in mind. So New York is gonna have property tax, which is, depending upon where we are in the state, it’s double what it would be in Florida. So their bureaucratic system is very slow, very cumbersome. You don’t need townships anymore, and you probably need counties unless you’ve got four, five million people.

California, for example, only has about 40 counties, yet they’re the biggest state in the union. They don’t have a lot of counties. Texas has a lot of counties (250), but neither California or Texas has townships. Townships are these little things that slow everything down to an absolute stall, so New York is a difficult state for people to buy in.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Ted Thomas: I don’t know what that is. What’s that?

Joe Fairless: I’m gonna ask you some questions and you’ll provide just some quick-hitting answers.

Ted Thomas: There’s two. The first one would be The Art Of War, Sun Tzu. The second one that I just recommended to everybody is Perry Marshall’s 80/20.

Joe Fairless: Yeah, it’s a great book. Best ever deal you’ve done?

Ted Thomas: I bought a high rise office building for 10% down, I syndicated the whole thing, I wrote off 500%, and then traded it into 600 apartment units. I did all that in two years.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Ted Thomas: It’s not one transaction, it’s an overall strategy of what you should do in real estate. People don’t that don’t understand think real estate always goes up, or they think real estate goes up steady… It does not; it has huge cycles, and if you don’t understand the cycle, you’re probably gonna go bankrupt.

Joe Fairless: What’s the best place the Best Ever listeners can get in touch with you?

Ted Thomas: Just go to TedThomas.com. We’ve got a little basic Q&A stuff there, there’s little free videos they can watch… So if someone wants to start small, that’s the place to be. I’m really not in the small business, I’m really in the outcome business where I teach people on the high end, but nowadays you have to have something on the web for 300-400 bucks, so we do have that, but that’s not the client we’re looking for. We’re looking for people that wanna make $10,000-$20,000 every month, and do that all year long. We’re really in the business of teaching them how to buy and sell those tax-defaulted properties. But we teach the other because you’re not part of the business unless you do some of that, so…

Joe Fairless: Ted, thank you for being on the show. Thanks for talking about both tax liens and also the tax-defaulted properties… And also going through that due diligence process that you go through when you evaluate a tax-defaulted property. You get the downloaded listings, you look at the pictures if they’re available, then you choose the ones you wanna look at based on knowing the county, knowing the economic factors like jobs, that sort of thing… Looking at the property if available, walking around the marketplace or having a team do that, seeing how active the brokerage community is, because it’s about the quick turnaround on the sell; that’s where a lot of rookies get burned. Then, ultimately bidding on roughly 10% of them, and those are the best ones that you know you can resell.

Thanks for being on the show…

Ted Thomas: Wait a second. Joe…

Joe Fairless: Yeah?

Ted Thomas: You’re doing a great job. I’m not just saying that to [unintelligible [00:24:53].20] I do a lot of webinars and I do a lot of these calls, and you’re on the [unintelligible [00:24:59].05] you’re doing a great job and you’re really helping your clients. You’re providing a great service.

Joe Fairless: I appreciate that, especially given that you have been on a lot of these interviews and I know you’re speaking from experience. Thanks for being on the show, I’m really grateful that you were on… I hope you have a best ever day, and we’ll talk to you soon.

Greg has been a licensed agent since 1992! His passion is teaching others about how to be successful as realtors and investors. Greg likes to use real estate as a vehicle that allows him to teach. In his words, “I love teaching, there’s not enough money in it, and I support that habit by real estate sales”. Hear what 26 years of selling real estate and teaching others has taught him. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Fund That Flip provides short-term fix and flip loans to experienced investors. If you’re looking for a reliable funding partner, their online platform makes the entire process super easy, and they can get you funded in as few as 7 days.

They’ve also partnered with best-selling author, J Scott to provide Bestever listeners a free chapter from his new book on negotiating real estate. If you’d like to improve your bestever negotiating skills, visitwww.fundthatflip.com/bestever

TRANSCRIPTION

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. With us today, Greg Gorman. How are you doing, Greg?

Greg Gorman: I am great, Joe. Thanks for the opportunity to be on your show.

Joe Fairless: My pleasure, and nice to have you on the show. A little bit about Greg – he’s been a licensed agent since 1992. He is a broker-owner of a national franchise, he’s been a content developer, international speaker, and of course, real estate investor. He has a team – Team Paradise; it’s made up of three licensed realtors and one unlicensed staff member. Prior to real estate he spent ten years in the insurance industry as an underwriter, and based in Naples, Florida.

With that being said, Greg, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Greg Gorman: I would certainly love to. First of all, welcome to Paradise. My hometown is absolutely awesome. We are on the lower West Coast of Florida, West of Miami, Fort Lauderdale. As you’ve mentioned, I’ve been licensed since 1992. I have been a broker-owner, I work for a local company now for the last ten years, so a lot of those roles.

I absolutely love what I do; I go out and teach across North America and some in Europe, just to keep it fresh and interesting and get people to continue to network in my hometown of Naples.

Joe Fairless: What are you teaching?

Greg Gorman: I’m teaching real estate systems and tools and technology, and that’s where my passion is… Because I love what we do. When I can shed a little light on how to make real estate business better, then my life is fulfilled. I love teaching; there’s not enough money in it, and I support that habit by real estate sales.

Joe Fairless: Well, let’s talk about the systems, tools and technology that you teach. How about we dig into each of the three. What is a system or the system that you teach that we need to know about?

Greg Gorman: Well, certainly if you’re in real estate, having a license will not make a career for you; it gives you the opportunity in whatever state that you’re in to sell real estate, but it doesn’t teach you to how to sell, it doesn’t teach you how to grow your business, it doesn’t teach you how to negotiate, it doesn’t teach you how to access information on a computer regarding real estate. So none of those things are available through your license. Your license just gives you the opportunity to make all those things happen.

We all the time are interviewing other agents and looking at their skills and scripts – the things that they do best, the things that they like to avoid, and we implement some of those. Some of them we try and we think “That’s not for us”, and then the ones that we really like, we like to share.

Joe Fairless: Okay, and for example…?

Greg Gorman: For example, some of the tools. Let me just implement social media into real estate. I love videos, so if I find an opportunity… Of course, when we go out and list a new property, we’re absolutely gonna do a video. We have professional photographers that will put pictures into play. There’s nothing better however to do a video walk through that property. Obviously, when you’re walking through and you’re walking through a kitchen, you don’t need to point that out; however, it gives us an opportunity to highlight some of the advantages of that particular kitchen. Maybe it has new cabinets, maybe it has a special set of appliances.

If we walk through a living room, obviously that’s the place; however, we wanna highlight – “Look at the beautiful golf view, look at the beautiful lake view. It’s got a magnificent pool.”

Those are the types of things that we like to teach our agents – how can you turn that listing into an add, post it to social media… And then really, we can get pretty technical however Facebook allows us now to choose the demographics of where that stuff should go.

Joe Fairless: Yeah, okay. So instead of when you’re walking through – and this is what I would do… If I’m walking through a house, instead of saying “Okay, now this is the living room” – d’oh, it’s obviously the living room, so you don’t need to focus on that… It’s more “Look at these big ol’ windows” or whatever the selling features are there.

Greg Gorman: It’s amazing, tens of millions of times a day I can guarantee you when agents are out showing property, they’re gonna point out the kitchen, the bathroom, the very obvious things; and really, why does an investor want to focus on that particular property? So if you’re listing to your clients, whether they be a first-time buyer or an investor, in the right proportion – your two ears and one mouth – if you can listen and interpret to what they want to find in a new property, you have the ability, using your skills, to highlight those things that are most important to them.

Joe Fairless: Yeah, I do walkthroughs, in a different capacity, but this is still a relevant point and that’s why I’m mentioning it, for any best ever listener who’s in a similar situation where you have a property that perhaps you are bringing investors into, and instead of me saying “Okay, this is the layout of the apartment. Here’s the living room, here’s the kitchen”, whatever, I would focus more on the enhancements that we would do to renovate the place, or I would focus on the spacious closet and then give a reason why I’m focusing on that spacious closet; this demographic like the walk-in closets, that sort of thing.

Greg Gorman: That’s perfect. It’s also our obligation — I mean, we can all talk about the bricks and mortar that makes a particular property. However, as agents and realtors especially – and I have several designations, by the way, so I think we do things a little bit differently – it’s important to tell the story about that particular property. Now, I’m in a destination market, so people come here, we have a lot of snow birds, we have 360,000 year-round people; in the winter months that grows to another 150,000 people who come here. Now, if I were in New York, Washington DC, San Francisco, the things that I would be telling about that particular story on that property, wherever it exists, would be the lifestyle around it.

If you were in the West Coast or in New York or in a metropolitan city walkability, access to groceries, restaurants, schools – are those all walkable distance to the particular property? That would be the story I would tell.

In my destination market I wanna know how close it is to social clubs, golf courses, maybe it’s schools, maybe it’s the arts and entertainment district, maybe it’s [unintelligible [00:07:47].13] The storytelling opportunities is what we should really be bringing to the transaction.

Joe Fairless: So you need to know the type of location and the customer that matches up with the location; that will drive the story.

Greg Gorman: It does drive the story. And so few of us are doing it; you can go read any MLS description of a property… In any MLS in the entire country we read the same thing over and over again – “This is a three-bedroom, two-bath pool home.” That doesn’t tell me anything about the property. That would not make me wanna go there.

Joe Fairless: Right. I just bought a place with my — now she’s my wife; she was my fiancee… We just bought a place about late 2016, and in the description it had the normal stuff, but then on top of that it said “And a short walk to this downtown area where you can go to a bar and restaurants, and another short walk to a park.” That’s really what captured our attention, versus the typical stuff that you see.

Greg Gorman: It’s gonna be for the end user, how it lives or how it works for that end user, and you have to have that skill of being able to listen; it’s not just about finding a property that’s either large enough or in the right price range. You have to be able to work that lifestyle or that need into that particular property before you’re gonna be able to cash out on the sale.

Joe Fairless: What’s been the most challenging property to come up with the story?

Greg Gorman: The most challenging property to come up with the story? I’m not sure I understand that question.

Joe Fairless: Is there a type of property where it’s tough to identify the story that you need to tell about it because of certain factors?

Greg Gorman: I actually am working with a buyer right now, and the way our MLS is set up, it’s almost an impossible thing to find. So I have a buyer who wants to move from Colorado to Naples, wants to be on a second floor or higher, an age 55 or older community, wants to be under 800k, wants to be within walking distance of dining, grocery stores and all, and the way our systems are set up and the way our construction over the years has evolved, I cannot find this gentleman a property. It either doesn’t fit into the price range, it doesn’t fit into the age 55 or older… Oh, he also wanted something that was constructed 2005 or newer. So that right now is a need I can’t fill for him, although we’ve been looking for about three months for it, that far into the process.

He’s looked at things that I’ve sent him that he otherwise liked, but he would say “I don’t like it for this reason” – it’s either on the second floor… And I will tell you a little bit of history behind that – he is quite concerned about flooding in Florida, the stories that we hear about climate change. Now, this is somebody who is in, I’m guessing, retirement age, and doesn’t want to in the future have to worry about flooding. So my second hometown is in [unintelligible [00:10:46].26], I have a high sensitivity to that. Miami constantly floods. So he is thinking that we’re also in that area that’s really prone to floods; we’re not at this time. Maybe that would be 40 or 50 years in the future.

So that’s his interest right now in finding a property, that elevate. So second floor won’t work, third floor or higher – yes. Age 55 – almost an impossibility, so something will have to give. He’ll have to compromise on one area or another before we’re gonna be able to pull the trigger on a property.

Joe Fairless: Have you said that point blank to him?

Greg Gorman: That was the first interview we had.

Joe Fairless: But it’s been three months…

Greg Gorman: It’s been three months so far, and it was an inbound referral from a well-known Chicago realtor, which in Chicago – not a problem. This was a client that moved away from Chicago to Colorado. That lifestyle hasn’t really made him happy, so he wants to focus on something else, so coming to a better climate – at least for him, it’s a better climate.

Joe Fairless: If you have that point blank conversation from day one, but it’s been three months since you’ve been sharing properties with him, what’s the endgame?

Greg Gorman: The end game is we’re in a destination market. I have actually worked with clients for five years before they ever bought anything. We start the process off with people looking, and then they get comfortable with the lifestyle. They may rent in the area first and then pull the trigger somewhere down the road. We’ve learned in any kind of market, certainly in a destination market, to have patience. And we’re in a very privileged market, as well. We have the highest of the highest end, and we also have [unintelligible [00:12:20].15] So it’s an area generally where people don’t have to buy, sellers don’t have to sell; if you don’t have patience, this certainly would not be a marketplace for an agent.

Joe Fairless: Yeah, I was wondering, because your time, as everyone else’s, is valuable… And to spend — heck, I didn’t even know the five-year thing that you said until you told me, but even three months… How much time are you spending and how do you deal with that, knowing that you’re spending time and he’s not pulling the trigger.

Greg Gorman: I’m 26 years in the business; it’s a thing that I’ve just learned. Because otherwise it would lead us to some disappointment. If you’re in a market like Chicago, New York, Boston, Washington DC where right now market and inventory is at a premium and time of the market isn’t very high, then of course for an agent to think that they may spend several months with a client might not be appealing; they would say “No, I’m not for you”, and move on. However, we’ve learned not to have the kind of mindset that if you don’t buy right now, I don’t wanna work with you. It’s an investment in our business, and it’s an investment in people.

It’s not about selling the bricks and mortar by the way, Joe, it’s about creating those relationships that are long-lasting. And it’s not about pulling the trigger here, and over my 26 years, most of my clients when they buy in Naples for the first time I’m looking at two future transactions with them personally, and a multitude of referrals. They’ll come and buy something small, they’ll move to a bigger house, as they age they decide to downsize and they’ll wanna find something in a happy medium. So I’ve learned how to have that patience and consistency over the years.

Joe Fairless: When you’re having that patience over — I’ll just continue to use this one example because it’s what we’ve been talking about, in this example… How do you allocate your time so that you know you’re playing the long game with them, you wanna build a relationship, but at the same time you’ve got to also focus on other things, too – so how do you manage your time with them?

Greg Gorman: That’s just a system. Almost all the MLS’s out there will allow you to put it automated searches, and that’s a non-touch system; you get notified anytime that particular client receives a new property that’s under the market. However, you don’t have to pick up the phone at that time unless you find something that “This is a real match. I think this is something that you ought to think about. Perhaps making a trip to Naples now would be in your best interest.”

Joe Fairless: Got it.

Greg Gorman: That’s just the system, and it works for all of us. If we have only one or two clients at the time, it’s devastating. However, I would hope that most of your audience is on a bigger scale, that you and they all have (like I do) [unintelligible [00:15:03].23] So we’re not working on one or two people at a time, we can work on 10 or 15 opportunities at a time, plus our listing inventory.

Joe Fairless: In terms of creating relationships that are long-lasting, what are some tactical things that you do to do that?

Greg Gorman: That’s where we shine at our greatest. My whole team and I have this mantra – we would not do real estate if it were not fun. So we do things that create not only fun for our team, make it exciting for us – a part of that comes through travel and teaching. We also have client events, we have them throughout the year, and we make it fun; we have some smaller parties, we have larger parties, we have kid-oriented parties. That has been one of the best things that we developed those relationships.

The last one we just had two Sundays ago – we had a wine tasting party at Total Wine, and we had 24 people at our wine tasting event. It was absolutely spectacular. We invited over 200 people. We do that for all of our events, and the first ones to respond, and it’s an online invitation that has to have an RSVP attached to it. So the ones that are available that can come and it’s of interest to them, they jump out on that invitation immediately. And typically, our events sell out within 24-48 hours.

Joe Fairless: Oh, I love that. So you have some scarcity because there’s only so many spots for the wine tasting and you send it out to everyone; it’s first-come, first-served.

Greg Gorman: We do. And we also poll our entire database – “What’s of interest to you? What do you wanna do in life?” Most of them here are foodies, they love wine; every December we typically rent out a movie theater, and that’s kids-related. So we have typically 175 tickets to pass out. That has always been [unintelligible [00:16:53].05] we’re already on the books for the next Star Wars release. Those are great for us, we love that. I will tell you, our investors and our clients love it that we’re not just focused on them, that we’re also interested in their family.

Earlier this summer I did a kids’ cooking party in my home. I had eight kids from the ages of 6 to 13, and they came in. We also had space available for their parents, because we knew they would wanna be there. We made gourmet dog treats, and then we made two types of flatbed pizza.

This was, again, one of the best parties, one of the best relationship builders we’ve ever done. The parents, although we had space outside with cocktails and things like that that were oriented towards them, nobody wanted to go out; they wanted to watch their kids, they wanted to film it.

We had two Facebook lives and an Instagram live going on, and this was a two-hour party. So their kids were making dog treats. We had their aprons, we had their hats for them… I love to cook, it’s one of my passions, and I know all these kids that came also shared that they watch The Next Best Chef, or all those shows that are on the Food TV network, and shows like that.

I probably have 30 kids on the waitlist, so we’ll be repeating one of those parties; we’ll likely do it sometime right before Thanksgiving and end of the year, so we can do a holiday-themed cooking class for kids.

Joe Fairless: Bravo! Thank you for sharing that. That’s helpful.

Greg Gorman: So we have fun. If it’s not fun, I don’t wanna do it.

Joe Fairless: Do you do anything like that for your clients who aren’t local, like mail them anything regularly or anything like that?

Greg Gorman: I think that’s just part of our business. Of course, we do market updates. It’s important, no matter where they live, to find market updates. So we send that out on a monthly basis; that’s e-mail driven, so absolutely. If you’re not keeping up with your database, that’s a huge failure. And you need to know too how their families change over time. Honestly, if you’ve got someone in a two-story home that’s been there for 25 years, all the kids are out of the nest, they’re likely gonna wanna downsize, so keeping in touch with them about “Would you like to find a right-sized property for yourself now?”

We like to engage with our clients on social media, we wanna find out what’s happening in their family. Real estate is one thing, it’s a vehicle. We truly have an interest in the people that we’re with.

Joe Fairless: If we’re looking to build our business, which we all are, this is a powerful conversation, and it’s an approach that you’ve got the experience in the industry and you’ve seen it work well… And it’s fun and it’s enjoyable along the way, and I’m very appreciative that you’re sharing this.

Greg Gorman: So look at a couple of examples that are kind of old school – Rotary Club, for example… How well has that worked over the years? And what about that component that makes a Rotary Club work? It’s an engagement process. You can join any club that’s out there, but the Rotarians have found projects that they can do together, it’s wide-based across all industries; it is communication on a routine basis, and this is a common mindset. Mine happens to be Naples, that’s our common community. How can we make that fun?

We know what our community is about, we know what attracts people to Naples, so why can’t you, with your business, attract that wider community?

Joe Fairless: Based on your experience being in the industry, what is your best advice ever for the Best Ever listeners?

Greg Gorman: I’m gonna put a spin on this and talk to your investors that are your Best Ever listeners. Here’s something I’ve learned over the years, and I have a little YouTube video that’s coming out next week – I was walking through one of the properties that I’m currently remodeling right now, and I’m just amazed (with my 26 year history) when I hear people say they wanna buy an investment property… And I think that’s great. They’re talking to agents out there, however Joe, that don’t even own their own home. So how can that particular licensee help an investor?

My mindset is if you own your own home, if you’re investing in properties to flip or to hold, then you’ve gotta have a skillset that others just don’t possess. So for your investor listener out there, why would you wanna go to any market anywhere in this country or foreign market and find an agent to help you buy an investment property and they don’t even own their own home, might not even own or flip property? That’s my mindset.

Getting to the right people at the right time about the right opportunity is so key… And the questions that you ask upfront will be the best questions that you can ask throughout the entire process, and it could cost you tens of thousands, if not hundreds of thousands of dollars if you make the wrong choice.

Joe Fairless: So we’ve gotta ask when we are speaking to agents if they currently own their own home and if they are an investor?

Greg Gorman: I think that’s where you start. If you’re going for a specialized surgery, you’re not gonna go ask the nurse to help you with that surgery, am I right?

Joe Fairless: You’re right.

Greg Gorman: You wanna find the best doctor, the best specialist that you can afford, and starting out with the initial questions will get you to where you wanna go.

Joe Fairless: Makes sense. Are you ready for the Best Ever Lightning Round?

Greg Gorman: Why not?

Joe Fairless: Alright, well let’s do it. First though, a quick word from our Best Ever partners.

Break:[00:22:42].25] to [00:23:45].10]

Joe Fairless: Alright, Greg, best ever book you’ve read?

Greg Gorman: Best ever book – I actually am repeating it right now… It’s How To Win Friends And Influence People, The Magic Of Thinking Big – those are two books. I read a lot of books. And for real estate, the best book ever written by Gary Keller is the Millionaire Real Estate Agent.

Joe Fairless: Yes, I love that book. I’m not a real estate agent, but I got a lot of value from that book. I actually hired an administrative assistant immediately after reading it, because he said in the book that’s the first hire you should have.

Greg Gorman: Right.

Joe Fairless: Best ever deal you’ve done?

Greg Gorman: Best ever deal I’ve done in real estate – I bought a home in the mid 300k, spent $30,000 on a remodel and sold for 605k.

Joe Fairless: Bravo!

Greg Gorman: I think we did that within 80 days.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Greg Gorman: Bought a luxury property for myself, the market tanked; I spent a million dollars, remodeled with $280,000, and sold for 980k. The happiest day of my life.

Joe Fairless: You just wanted to get rid of it?

Greg Gorman: I had it on the market for four years.

Joe Fairless: Oh, my gosh… What were the years?

Greg Gorman: I bought it in 2005, closed on it in January of 2010. I took a check to closing to make it close.

Joe Fairless: What’s the best ever way you like to give back?

Greg Gorman: Best way I love to give back is through people, helping people who are not expecting help. Doing little things for them that have a big impact, and a lot of times it’s through their kids.

Joe Fairless: And how can the Best Ever listeners learn more about you and your company? Where can they go?

Greg Gorman: ThinkNaples.com. Very simple. My whole team is out there, what we do is out there… You’ll find me on social media through ThinkNaples.com, so that’s the best way to find me.

Joe Fairless: Perfect, we will include that in the show notes of this, so Best Ever listeners, you can just simply click the link ThinkNaples.com and it will take you to the Team Paradise page. It looks like a place I wanna go right now, the first picture… [laughs]

Greg, thank you for being on the show. Thanks for talking about how to build long-lasting relationships and how you’re doing it and how you have done it successfully, from the events where you’ve gotta RSVP quickly – I love that part, because it conditions people to value the email that they receive from you; that’s kind of a subconscious thing. And then just consciously, you’re having fun, they’re having fun, it’s enjoyable, you’re getting to know them and you just build a long-term relationship.

As you know, you have a relatively high lifetime value of a customer because as you said, you have usually two transactions per customer, and I imagine those are decent dollar figures, given your market. First transaction they buy big, second transaction they scale down a bit and you’re the person who’s helping them along the way.

Thanks for being on the show, Greg, I really enjoyed it. I’m gonna implement some of these things in my own business. I hope you have a best ever day, and we’ll talk to you soon.

For the first five years of his career he never did a project worth more than $100k. Eventually he mastered his craft and moved on to $1,000,000 plus projects. If you are an investor, you’re going to want to take notes on this one. And what in the heck is a Mirco-Mansion? If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

Joe Fairless: Well, that is a phenomenal perspective. I am coming from – let’s see – a two-story house in Cincinnati, Ohio, looking over a suburban neighborhood street. [laughter]

Frank McKinney: Hey listen, I’m a Midwestern at heart; I’m from a little town in Indiana called Carlisle, Indiana, so… It’s a long way from the corn field to the tree house.

Joe Fairless: [laughs] Well, a little bit about Frank, and then we’ll dive in and he’ll give us more details. He is a real estate artist, and he is gonna talk about what that is. He is a five times best-selling author and he built an oceanfront spec house valued in the tens of millions of dollars which shattered records, and shatters records on each new project. He just completed his new project, a micro-mansion – which seems like an oxymoron; we’ll have to learn more about that. He started with a $50,000 fixer-upper home and climbed all the way to a 50 million dollar oceanfront mansion. Holy cow, we’ve got a lot to talk about, a lot to learn from about you.

With that being said, Frank, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Frank McKinney: So I’m coming from Indiana with a 1.8 grade point average, having exited my fourth high-school in four years with a GPA of 1.8… I got a one-way plane ticket out of little Indiana, landed in South Florida in Palm Beach many years ago, and pursued at my professional highest calling. This was back in the days of Robbing Leech, and the lifestyles of the rich and famous probably before your time and many of your listeners; kind of like MTV Cribs nowadays – you get to look inside of the lifestyle of the rich and famous. In South Florida there were people living it; I was young, I was impressionable, and I learned… I was a maintenance worker, then I was a tennis pro (teaching tennis pro, not a touring tennis pro).

On the tennis court I learned from most of my students that their plan to riches and fame and fortune wasn’t through their 9-to-5; it was taking the money they had left over after paying bills, after using their discretionary income to live on, and investing in real estate. This was before there was any podcast; the word “podcast” didn’t even exist, there was no money down program. This was just learning from people on the tennis court, as I taught them a better forehand or backhand, “How did you get to live this lifestyle?” and the answer I heard over and over again was real estate.

I followed their advice, I bought my first fixer upper almost 30 years ago, flipped it (before there were any flip shows or anything) and I made $7,000. Fast-forward to today, we build oceanfront spec homes, which are big, very beautiful homes, built on the ocean, in Palm Beach, on speculation [unintelligible [00:05:16].10] I’m a real estate investor still. We’ve built 42 of them since 1992, with the average selling price of 14.4 million and 56 days on market. So whether it’s the best ever advice ever or not, I am a real estate investor, I make my money in real estate investing, as a real estate artist, and I love the business. You’re in the right business if you’re listening to this podcast.

Joe Fairless: You gave us so much to talk about… Let’s start with the term “real estate artist.” What does that mean?

Frank McKinney: This would be considered some of the best real estate advice I could give you – in the business of real estate you can classify yourself a flipper, a wholesaler, a retailer, a shortseller, a contractor, into storage units, on and on and on; there’s a ton of ways to make money in real estate. From that very first crack house that I did 30 years ago, I looked at that little 620 square foot, two-bedroom, one-bath house as a dilapidated piece of art, that I didn’t cut corners on. I replaces the roof, I put $20/yard carpets in instead of $10, I put three coats of paint on instead of two… I made it the nicest little crack house on the block, but it wasn’t a crack house when I was done, it was a beautiful house.

And you know what? I’ve taken that approach to now some of the most beautiful homes. If you go to my website, Frank-McKinney.com, you’ll see some of the most beautiful homes ever created. Three-dimensional art really, Joe, on the sun-drenched canvas known as the Atlantic Ocean.

So my advice to the real estate investors, to the buy and hold people, to the buy at value and sell people – anybody in this business, take an honest approach. What that really means is that if you were an artist and you went to a paint store to buy paint to paint a beautiful painting like Van Gogh, Renoir, Monet, would you cut corners on the paint that you bought? Would you buy the cheapest canvas, the cheapest brush? No, you’d have passion for what you did. And I’ll tell you, it served my brand extremely well taking that artist approach.

Joe Fairless: I suspect, although you let me know, that the higher-end you go, the more you’ll be compensated for taking the artist approach, versus on your $50,000 house you made $7,000, but you did three coats of paint instead of two etc. Is that one of the reasons why you continue to go up in price point and luxury, because you get compensated or rewarded better for taking that artistic approach?

Frank McKinney: There’s more zeroes in your profit, but there’s not more percentage margin. So I would push back to anybody who said “No, it’s a bottom line driven business, it’s a commodity driven business, it’s how much can flow through to my bottom line.” For the first five years in my career, Joe, I didn’t do a house worth more than 100k. I did hundreds of them and I did them really well; my margins increased from $7,000 on the first deal to where we were making 25k on a 100k sale. That’s a really good margin, that’s a 25% return. So if I build a ten million dollar house, I’m still basically making that same return, 2,5 million dollars, but it’s a couple more zeroes.

I implore you, or I encourage you, as a real estate investor, to take that artist approach from the very beginning. When I realized I got good at the craft of real estate — you know, Malcolm Gladwell in his book Blink says that to be an expert at anything in life you’ve gotta put in 10,000 hours. 10,000 is five years full-time, and I look back at my career to the first years; I didn’t do a house worth more than 100k. Guess what – I got good at the craft of real estate, so it was a natural progression. It wasn’t even any anxiety or fear, I just moved up the price point. As a matter of fact, I jumped from a $100,000 house to a 2,2 million dollar house. There was nothing in between. Since that 2,2 million dollar house — as I’ve said, we’ve done 42 of them with an average selling price of 14 million…

So it’s not for everybody, Joe, as far as taking the artist approach. I can’t sing, I can’t play an instrument, I can’t draw a stick figure, I can’t mold clay, but we’re all in this three-dimensional art business called housing, and I encourage you to take that approach.

Joe Fairless: I wanna throw out an example just to make a distinction, because I think you will agree with this, but I’m not sure; I wanna give you the example and hear what you have to say… So the problem could be that someone hears this and they’re like “Okay, I’m going to put gold-plated door knobs on my $40,000 fix and flip”, but that’s not what you’re saying, right?

Frank McKinney: No, let me [unintelligible [00:09:40].19] and assume that nobody listening to this call is an idiot, and that they wouldn’t do something like that.

Joe Fairless: [laughs] I like to use extreme examples just to make a point, though.

Frank McKinney: No, I understand. You’re making a very valid point, and this is what I probably should have said first… I’m a real estate artist, but what none of us wanna be is a starving artist. Of course, the real artists that are out there, starving artists with their angst, they may have their apparel and that little hat, and they’re kind of living in Seattle or whatever, starving — no, I’m a business man first, Joe. Believe me, I have a formula. Let’s get away from the artistry and let’s go to the formula, that is also — I wouldn’t say the best real estate advice, but good real estate advice. My formula is very simple – acquisition basis (what it cost to buy the opportunity) + improvement basis (what is cost to fix it up or build it; in my case, I do a lot from the ground up) should never equal more than 65% of retail.

Let’s use a 100k example. Acquisition could be 60k, fix-up could be 5k, you put it on the market for 100k, you have some negotiation, you have some closing costs, you run a little over budget, and you end up selling it for 90k. You’ve got 65k in it, and there’s your $25,000 margin.

But to get there, Joe, that same $100,000 example, in my early days, I wouldn’t ask 100k; I would ask 105k. I always made a new high in the market. That’s why we sold the most expensive spec house in the history of Palm Beach county. I’ve sold a spec house in 2006 for 50 million dollars. That was unheard of. So I am an advocate for — now, this is my approach; it’s not gonna be everybody’s. There are some that say “Buy low, sell low.” That’s not me. I buy low and I sell extremely high, and I’m able to do that, Joe, because I take that artist approach by putting a little bit more money, and guess who that satisfies? Two very important people – one, the buyers, of course; two, the appraisers. The appraisers come in and if my house is in a 100k neighborhood, my house would appraise at 105k. That extra $5,000 meant a whole lot, in that case. It’s 5%; if I’m building a ten million dollar house, that’s another half a million in my pocket… Because I’ve taken that approach for almost 30 years.

Joe Fairless: What are some ways – and you can use the examples of the 100k or the 50 million dollar, whichever one is fresh in your mind the most – that you take it above and beyond, so that you are reaching the market highs?

Frank McKinney: Okay, I know we only have 20 minutes, so what I’d like to do is give the macro answer, and I’ll send you to my book “Burst this!” for 165 pages of a lot [unintelligible [00:12:24].29] out of 400 for the micro answer. The macro answer is – and this is the best real estate advice ever…

Joe Fairless: Let me ask you the question, because I have lead-up music, and everything… So Frank, what is your best real estate investing advice ever?

Frank McKinney: [laughs] Okay, you as a real estate investor must tighten the experience your buyer or your renter has with their five senses to the state of subliminal euphoria. I’m gonna repeat that: heighten the experience your buyer or renter has with their five senses (sight, sound, smell, touch, taste) to the state of subliminal euphoria. They became intoxicated with the experience they have when they walk in the front door of your house.

I wish we had more than 20 minutes, I could go into a bunch of examples, but I touch on sight, when they walk up the driveway [unintelligible [00:13:18].22] sound coming from a room you can’t see where the speakers are, because they’re beyond the drywall. Touch – I make you take your shoes off when you walk in the bedroom because there’s $180/yard carpet in there imported from Holland that you don’t need a mattress to sleep in that room; I want you to feel that, because the bottom of your feet are the most sensitive parts of your body when it comes to receptors.

Taste – maybe in the $100,000 days it was Dorritos and Mountain Dew; I had something there for you to eat. Now it’s caviar and wine and chocolates and that kind of stuff.

Smell – back in the days it was cookies in the oven at 125 degrees instead 425, so you smell the cookies. Now you can buy scents online; lavender is the scent that evokes people into a buying or a renting mood.

So think about those five senses and go to my “Burst this!” book and I enumerate all the things that I do to touch the five senses that cause them to pay top dollar for my properties.

Joe Fairless: Very helpful, and even though you said you weren’t gonna give specifics, you did give some specifics, so I appreciate that. Let’s talk about that 50 million dollar spec house that you sold at a new market high, specifically with that example… Because we do have time to go into a case study. Tell us about that one and how you were able to take it to the new high.

Frank McKinney: Do you mind if I talk about this micro mansion in that context?

Joe Fairless: Yeah, sure.

Frank McKinney: Because I think it’s very current; it was just about a month ago. I’ve seen this tectonic shift in the ultra-wealthy buyers preferences. I have built bedrooms bigger than the house I just finished, and that is a truth. I built a 2,100 square foot bedroom; the house I just finished was 4,087 square feet, so 13 square feet smaller than a bedroom I built. So you have buyers over more houses and more places, and they’re staying in them less time, and they’re using less of them, so we took the opulence, the grandeur, the artistry, the beauty and shrunk it into a much smaller house.

When you walk up my driveway, the first thing you’ll see is a white porcelain driveway – a white, beautiful porcelain driveway. You’re coming from Chicago, you’re coming from Ohio, you’re coming from New York – you’re gonna see beautiful, lush, tropical foliage with coconuts hanging up the coconut trees. You walk by the front door — there’s three pools here. There’s a pool for your [unintelligible [00:15:38].26] You walk in the front door, I have kitchen countertops, Joe, that are the only countertops in the country made out of sea glass. If you were on the beach and you picked a piece of sea glass inside of your fingernail, well I’ve got thousands of those that were melted down, put into a mold and made into — if you go to my website, you can take a tour of the house; we’ve just posted it… Beautiful sea glass kitchen countertops.

There’s a sun deck floating between two pools. When you walk in the door, of course you’re gonna smell that beautiful lavender. Your sense are heightened to that point where right by my front door — at all my houses when I build them I have a contract with everything filled in but the buyer’s name. I put the full price in there, because I assume that’s what they’re gonna pay. That’s a very important lesson. Why? Because once you’ve intoxicated your buyer or renter with their five senses, what happens, Joe, is the impulse window opens. They’re buying on impulse. There is a need – for most people, they need shelter, but it’s turning that need to want (and in my case, desire) that once you’ve done that, you’ve gotta close them, and that’s why I have a contract by the front door.

Joe Fairless: I love that approach. Every best ever listener who’s a real estate agent is writing that down right now; I can hear them scribbling on their notepad.

Frank McKinney: Well, if you are an agent – again, my book “Burst This!”, Re/Max and Century 21 makes the marketing chapter (because it’s more for investors) required reading. It is the longest section in the book. You could overpay — now, let’s talk to the investor… You could overpay for the opportunity, you can over-improve – say your 65% is up to 75% – but if you know how to market, you could make up for a lot of sins. You’re gonna make up for a lot of mistakes.

I give all the tours of my houses; I list them, I believe in brokers – I have the same broker for 15 years – but I want you to have an experience when you come through here, or any of my houses. So read and absorb the 165 marketing initiatives that I touch on a weekly basis.

Joe Fairless: As far as the micro-mansion goes, what’s the square footage of that one? And is it just one, or is it multiple micro-mansions that you’ve built?

Frank McKinney: One is a prototype I just finished. It’s like a Tesla rolling off the assembly line for the first time, or an iPhone 1, right? There was a prototype at some point. So the one I’ve just finished is 4,087 square feet, and I went to school on it; I went to school of the people who have walked through here as buyers, million dollar real estate brokers, media that have come to the house… There’s 22 different feature articles; if you go to my website, you can read about what people said about the micro-mansion. I’ve absorbed all that, digested it, and we have designed and are building another one. This one not 3,5 million, this one will be 20-30 million, but only 800 square feet… So you do the math – that’s $5,000-$6,000/square foot. Nobody is getting that. There’s a couple condos in Miami that are scratching 3k, maybe 4k a square foot… But it’s not the money. The money isn’t the issue with these people. It’s the finishes, the artistry, the grandeur, the opulence in a smaller package.

So the short answer is I went to school on the first one, and we’re breaking ground on the second one probably by the time this podcast is playing.

Joe Fairless: A high-end property that you’ve built that was on the market the longest – what was the reason why it was on the market longer than the average compared to your other ones?

Frank McKinney: One reason I’m gonna give you is my fault, the other is the market’s fault, and I’m not one to lay blame anywhere else, but when our market crashed in South Florida in 2012 and hit the bottom, we lost 35% of our oceanfront values. It was catastrophic. So that property that I finished at the time was on the market for 14 months, right in the heart and the heat of that meltdown, so that didn’t help. B) I did get carried away with the artistry. I put in a glass water floor. When you walked in the front door of the house, you were walking on water. It was 20 feet by 30 feet, so 600 square foot [unintelligible [00:19:39].00] thicker than what you have at your drive-thru teller line, [unintelligible [00:19:45].24] 18 inches of water, lotus hand-painted garden motif on the bottom, bubbles running through it, fish down there… It was insane!

Now, it was cool, but I’m not building a museum; [unintelligible [00:20:01].29] This is a house where people had to live, and there are a number of people who look at my houses, Joe, that are a little older than you and me. They might in their 60s, their 70s, and I saw them walk across this glass floor and got vertigo, they got dizzy. Not everybody is used to walking on water. There was no death perception, so… There were certain things that I did in there that I did get a little carried away, that I learned and toned down.

Joe Fairless: So with the properties that you’ve bought and then sold as a developer, do you then invest those dollars into your own real estate portfolio?

Frank McKinney: Here’s my approach – I am not a buy and hold guy; I am a buy, add value and sell guy. I have nothing against the buy and hold person… So here’s the advice I got — it was funny, because it was from my dad, who wasn’t even in real estate; he was a banker. When I got into real estate – and I would say this is good real estate advice; maybe not the best, but it’s applicable – he said “Look, you don’t know what you’re gonna do in real estate.” I was in my early 20s. He said “You know what? Make a little money and then decide (I’m gonna use my words, not his) if you wanna be a wholesaler, a buy and holder, a flipper, a bank REO person, a contractor. You need a little money to decide, so enter the cash accumulation stage. Just buy a piece of property like you’re planning to sell it, make that $7,000, chart a few until you get to 100k, and then decide what you wanna do – buy and hold, what have you.”

And you know what, Joe? I never left the cash accumulation stage. I never left. I still continue to do what I was doing with those $50,000 houses – buy, renovate, sell. So when I do project, I’m not a big fan of a lot of debt – and this is good real estate advice, too. Debt is a four-letter word, folks. Look at what happened to Greece, look at what happened to Italy… It took down whole countries. It almost took down our country too, when the real estate market crash came. So be careful with debt, the four-letter word; know it’s a four-letter word.

Joe, I don’t over-leverage. I do put a lot of my own money into the projects, depending on how cheaply I can borrow money, and if you’re borrowing it prime now, you’re basically borrowing it free… At like 2%, or whatever it is. Now, that’s responsible debt. But if you’re getting the hard money loans and you get up towards 12%-15% and three points, watch out if you’re not able to turn the property.

Joe Fairless: On a typical project, what type of leverage do you have on it?

Frank McKinney: I tend to not go over — let’s use the 100k property as an example… I don’t wanna be more than 60%-65% leverage.

Frank McKinney: Okay, best ever book I read is gonna be a part of your best real estate advice from a marketing perspective buy and absorb Charlie And The Chocolate Factory. [laughter] No, seriously! What Willy Wonka did to drive the desire to buy his chocolate – think of that as your real estate… Eccentricity, exclusivity, marketing genius… It is the best marketing book I’ve ever read. Charlie And The Chocolate Factory – you can read it in two hours.

Joe Fairless: Bravo! I love this approach, thank you for sharing that. One of my favorite responses… Perhaps my favorite response to that question.

Best ever deal you’ve done or built?

Frank McKinney: Probably flipping a piece of land that I planned to build — we were gonna be the first to build a nine-figure spec house… 135 million dollars. I spent a year in Italy. 72,000 square feet. I had my heart set on it, Joe, and I had somebody drive up and offer me 10 million dollars more just for the dirt that I paid for it, and I wasn’t gonna do it. I went and sought counsel from an 85-year-old advisor of mine that’s still living today, and he advised me to pick the bird in the hand. That was the best advice I had gotten, because had I not and listened to my ego and wanting to get to nine figures, I would have been doing that during the housing crash and I would have been talking to you from a dumpster today. [laughter] I would have been bankrupt. So that was my best deal ever – listening to reason, and then the profit… Obviously, it was a great flip, but I’m most proud of listening to good advice.

Joe Fairless: What’s a mistake you’ve made on a deal or a particular transaction you can think of?

Frank McKinney: Being too greedy, so the opposite of what I’ve just referenced. My very first oceanfront project — remember, I was up to $100,000, I was making 25k. I jumped to 2,2 million. I had one million dollars into that deal, I put it on the market for 2,2. I got a 1,8 million dollar offer, and within two weeks I got that offer. I thought I was god. I mean, “I’ll get the full price.” I thought “I can walk on water.” That was an $800,000 profit I walked away from. Long story short, the market crashed (a minor crash). I ended up selling that property for 1,3 million dollars seven months later, so… Foolish. The 1,8 [unintelligible [00:25:50].16] came back to hit me in the head like a baseball bat. Greedy, dumb, and I never swung for the fences again, Joe. I’m happy to take a single and move on.

Joe Fairless: What’s the best ever way you like to give back?

Frank McKinney: You saved that for last… That’s what my life’s all about now, it’s our Caring House Project Foundation. We build self-sufficient villages in the poorest country in the Western hemisphere, in Haiti. I’ve built 24 villages in 21 cities in 14 years. I’m transitioning eventually out of the real estate business; I’ve been over in Haiti, as I said, those 14 years. We have provided 10,616 desperately poor children and their families with housing, schooling, community centers, clinic work, doctors, renewable food, clean drinking water… Please, if you do nothing else, go to my website, Frank-McKinney.com, click on the Caring House Project link. That takes up half of my time, to run our charity building these self-sufficient villages.

Listen, regardless if you’re religious or not, or if you’re even having a preference, there’s a great life mantra that has to be a biblical passage that goes as such – Luke 12,48, look it up in the Bible: “To whom much is entrusted, much is expected.” I was entrusted with a lot, especially on the professional life’s calling side. Each one of you listening to this podcast has a professional highest calling, but what’s your spiritual life calling? Fortunately for me, I was able to put them together, dovetailing my professional highest calling, building houses for the rich, and building a bunch of smaller houses in Haiti for the poor.

Joe Fairless: And how can the Best Ever listeners get in touch with you or your company?

Frank McKinney: I don’t know if they wanna get in touch with me; I mean, I try to answer every bit of e-mail and stuff I get, but the best thing to do if you wanna be entertained and educated is just go to Frank-McKinney.com. You can take tours of the houses I referenced, the micro-mansion, the 15 million dollar house, you can read chapters, I’ve got five books and four in four genres; you can read those, you can see what our Caring House is doing in the Haiti… Right now we’re building our 24th village. Frank-McKinney.com.

Joe Fairless: Frank, thank you for being on the show. Thanks for talking about your experience and evolution as a real estate artist, why you call yourself a real estate artist and the approach that you take, which is seen throughout all the projects that you do… The macro level answer that you had on how to sell your property at the highest relative to the market, and that is to – and I’m gonna paraphrase – heighten the experience of the five senses to subliminal euphoria. You talked through some specific ways of doing that; you have that in your book, as well. Then also talking about the formulas that you use, the 25% margin being the goal, as well as acquisition basis + improvement basis should never equal more than 65% of retail.

Frank, thanks so much for being on the show. I hope you have a best ever day. I really enjoyed it, and we’ll talk to you soon.

Business credit, such a mysterious topic… Most of us don’t understand it, but after this episode you should understand and use it. Business credit is established off of three indicators and through one of them you may already qualify, here’s a hint… You don’t need good personal credit. Tune in and take notes!

– Director of Business Services at Credit Suite
– Internationally known speaker, author, and business credit expert
– Author of two books Perfect Credit and Business Credit Decoded and has been featured by Entrepreneur, Inc, and Forbes
– Over 17 years of financial experience
– Based in Land O’Lakes, Florida
– Say hi to him at http://www.creditsuite.com/

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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I’m Joe Fairless and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff. I hope you’re having a best ever weekend.

Because it is Sunday, we’re gonna talk about a special segment… That segment is skill set Sunday, where you come away – and I come away; I’m learning, too – with a specific skill that perhaps we didn’t have before the conversation, or we simply hone a skill that we had prior, and it gets a little bit sharper to help us be more successful.

Today we’re gonna be talking about how to get a line of credit for your business, so you can do more deals. With us today, Ty Crandall. How are you doing, Ty?

Ty Crandall: Good, Joe. How are you doing today?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Ty – he is the director of business services at Credit Suite. He is an internationally-known speaker, author and business credit expert. He’s the author of not one, but two books on the subject, and he has over 17 years of financial experience. He’s based in Land O’ Lakes, Florida. With that being said, Ty, before we get into the nuts and bolts of how to obtain business credit for a real estate investing business, can you give us a little bit of background on yourself, just briefly?

Ty Crandall: We were just talking before the show – I know you’re out of Ohio, and I actually grew up in a small town in Indiana, and literally joined the military to see the world… They put me an hour and fifty minutes from home in Ohio. I got out of the military – I was doing medical there – and I’ve been in financial services ever since. I really found a passion with business credit. I found that a lot of business owners just don’t know much of anything about business credit, and I discovered it myself about going on seven years ago.

I’ve been passionate, and this is what I do – I get out there and teach everybody that will listen about exactly what business credit is and how they can use it to grow their business.

Joe Fairless: I certainly am intrigued… Before we dive into that, first off, thank you sir for your service in the military.

Ty Crandall: Thank you very much, I appreciate that.

Joe Fairless: Alright, let’s roll into the good stuff, let’s roll into business credit. We’ve got real estate investors on pins and needles, being like “Yeah, I want some business credit!” How should we think about it? How do we approach it?

Ty Crandall: Well, the one thing to know – and a lot of people don’t know; about 90% of the population doesn’t know – is that you actually as a business owner have three credit profiles. You have your consumer credit, which we’re obviously all familiar with TransUnion, Equifax, Experian… You also have what’s called “bank credit”, which is an internal credit scoring system that the bank uses to rate whether you’ll get a bank loan or not, but most commonly what you’ll run into is corporate credit (or business credit).

What business credit is is it’s basically an entire credit profile that’s linked to your business’ EIN number, the same as your consumer credit profile is linked to your social security number. But the biggest difference is that you are completely separate from each other, so you can build business credit without personal liability, you can build it without any kind of personal credit check, so no matter how good or how bad your personal credit may be, you can still get very high limit credit accounts using your business credit.

There’s a lot of benefits, but the biggest way to look at it is that you literally have two separate credit profiles. One comes down from your social security number, the other is right below your EIN number. In obtaining business credit, you can get really high limit accounts to be able – like you said – to fund your business, which a lot of real estate investors use to even purchase real estate.

Joe Fairless: Alright, please continue.

Ty Crandall: The way business credit works is ultimately very similar to how consumer credit works. With consumer credit you start with no credit profile on score; you obtain credit that reports to the consumer credit reporting agencies, you pay those bills as agreed, you’re issued a score. With business credit it just happens a lot faster. With consumer credit you have to have six months’ worth of credit reporting for FICO to even give you a score.

In the business credit world, as soon as accounts start to hit your business credit reports with Dun & Bradstreet, Equifax and Experian Commercial, then you’ll immediately be rewarded with a score. One of the huge benefits there is with consumer credit there’s five components that make up your FICO score. Things like length of credit history and credit mix – it’s very hard and convoluted, and it’s tough to get a really good score unless you have many years of well-disciplined borrowing. But with business credit, your scores are literally the reflection of how you pay. If you get accounts, you pay them as agreed, on time, you’ll immediately be rewarded with a good score.

Within 30 to 60 days those accounts report, you’ll get a good score. With some reported accounts and a good score, you can then continue to get higher and higher limit accounts. And again, all that it takes is just reported accounts that are paid as agreed. If you pay the accounts early, then you get an even higher score. Once this starts to happen, the credit reporting agencies then issue a credit report, if not already.

A lot of people have credit reports because the credit bureaus know who you are, but they have low scores or just no credit reporting because you’ve never done anything with it.

Experian, for example, out of 100 points scale with 100 being the highest will give somebody a 28 or 29 score just because they know they exist, but the person has not built any credit. The minute you start to build credit, your scores get high, the reporting agencies start to recommend you for higher and higher credit amounts. Then with about five accounts reported, you can then go into most stores. You can go into Staples and Home Depot and Office Depot… Almost every major retailer – Sam’s Club, Costco, BT, Chevron, Sunoco… They all offer business credit, and you’d be able to apply, leave your social security number off the application, forcing them to pull your business credit only, and then you’re able to get very high-limit accounts based on that established business credit profile and score.

Joe Fairless: How do you check your current business credit score?

Ty Crandall: There’s three different reporting agencies, as I mentioned: Dun & Bradstreet, Equifax and Experian. Anybody can go to our website, which is CrediteSuite.com/reports, and we have links to all three of them there. Or you can go to any of the three directly, and then pull your business credit report. It’s anywhere between 30-60 bucks with each reporting agency to see what’s on there. With Dun & Bradstreet, they have a service called iUpdate which is absolutely free. Go to Google, search iUpdate, and even see if Dun & Bradstreet knows you exist, if they have in information, if the information is accurate.

You can easily access your reports, and it’s important to note that so can anybody else. With consumer credit we’re very used to having to give permission for somebody to pull our credit reports, and that’s required under the Fair Credit Reporting Act that says that somebody has to have a permissible purpose to be able to access your information. But in the business credit world, literally I could right now pull business credit reports on any company with just their business name, and that report will say your employees, your revenue, it says your profits, it talks about any outstanding loans you have, anything that’s reported, your high credit limits, your recommendations – all of that is available to anybody that wants it. So not only could your listeners access their own business credit reports through Dun & Bradstreet, Equifax, Experian, they could literally pull their prospects, their clients, their competitors, as well as all of those other people can pull your listener’s credit reports the same.

Joe Fairless: I’m on Dun & Bradstreet’s website… Do you have to have the address and the city and the state and the zip code of the LLC?

Ty Crandall: Not typically. You will if there’s a lot of records with the same name. In my live Facebook and Periscope streams we do this all the time with people. What we’ll do is if you give me your business name, we’ll pull in the business name and you can see in the search if they know you exist, is it pulling up a record, or is it pulling up multiple records because there’s multiple businesses with the same or similar name. That’s where a city and a state helps to narrow it down. Nine out of ten times I type in a business name, the business name pops up, and that’s maybe the only one. Then the rest of the time there’s multiple records, and by knowing the city and state I know which one to pull. You can pull a report with only a name; if multiple names come up, that’s when the city and state becomes important to narrow down which company it is exactly that you’re trying to pull a report for.

Joe Fairless: You mentioned that once you have five accounts or so — is it “or so”, or is it definitely five accounts and you then can go into most stores, like Costco?

Ty Crandall: Each store, each retailer is a little bit different. You wanna get started the same: there’s really three different ways you can start building business credit. You start with what are called vendor accounts: Uline, Quill, Seton, Monopolize Your Marketplace – this type of vendors are unique because they do two things… They report to the business credit reporting agencies and they will give you credit even when you have absolutely none already. So you could go into Quill and order 50 bucks worth of office supplies, throw it in your shopping cart, go to checkout, and they offer an option of Invoice Me. If you choose Invoice Me, you could place that order without ever giving them a credit card; they then process your order. Sometimes, if you’re a brand new business, they may make you order one or two times before they do this, but in a lot of cases they immediately issue the credit, they send out your order, and then they invoice you. Then, as soon as you get the invoice, your pay your bill, they then report that to Dun & Bradstreet, and then once you have five of those accounts – which we call “payment experiences” – reporting across all three of the reporting agencies, so two could report to Experian, three could report to Dun & Bradstreet… That gives you a deep enough credit profile and score that most retailers will then start to issue you credit from that point on.

Joe Fairless: So we’ve got Quill, which I had to google because I’d never heard of this company… But it looks like an office supply store, like an online Staples, basically. So you could go to a company like Quill – that would be step one. You said there are three ways to build business credit. The first step is to have vendor accounts, and Quill would qualify for that. What’s the second way?

Ty Crandall: The second way is through Dun & Bradstreet’s credit builder. Dun & Bradstreet has a product called the Credit Builder. If you get on the phone with them, they’ll charge you $1,500 or $2,000 for it. You can also get it with a monthly subscription of about $150/month. What they’ll do is they accounts you already have and they will add it to your Dun & Bradstreet business credit report. Let’s say you’re paying a software company monthly for your CRM software. You can have that reported and then have an account added to your credit report you already have. That could then give you those initial trade lines. The only drawback is it only works with Dun & Bradstreet, so if you’re applying for credit where somebody pulls Experian or Equifax you still wouldn’t get approved.

So option one is still better, because it works across all three reporting agencies. But the Credit Builder can work for you if you’re applying for credit where they’re only looking at your Dun & Bradstreet reports, and you’ve gotten with Dun & Bradstreet, got with their Credit Builder and had a handful of accounts added.

Joe Fairless: If you are in step two of the three-way process to build credit, how would you know what the group is that’s eventually gonna give you the credit, what they’re looking for?

Ty Crandall: You won’t. It’s trial and error, and that’s why I recommend the vendor step. Building credit across all three reporting agencies is as important in the business world as it is in the consumer world. You never wanna have all your credit on TransUnion and nothing on Experian and Equifax in the consumer world. You can imagine the problems that would cause, especially in mortgages, where they’re looking at the middle of three scores.

It’s the same in the business credit world. Dun & Bradstreet – sometimes people will use it as a shortcut and it will help them in some cases… But in a lot of cases it can create issues because you’re only building credit with Dun & Bradstreet, not with Equifax and Experian. So if you have a choice, you wanna go the vendor account route… Which you do have a choice. You wanna go with the vendor account route – that’s the better, cheaper way to go, than trying to deal go with Dun & Bradstreet’s Credit Builder.

Joe Fairless: Okay, that makes sense… And just so I’m clear – I’m taking notes, I’m trying to track the three ways to build business credit. Number one is vendor accounts, for example Quill, and underneath vendor accounts you can go through Dun & Bradstreet’s Credit Builder and pay the $150 subscription; it might be what you need, it might not be what you need. So that’s number one. What’s the second way to build business credit?

Ty Crandall: The first way is to use those vendor accounts… To go out to Uline, to Quill to get those added.

Joe Fairless: Okay.

Ty Crandall: The second is Credit Builder. It’s to go through Dun & Bradstreet and pay them to have accounts you already have added, instead of going and getting new credit at reports.

Joe Fairless: So three ways to build business credit. One, vendor accounts, which is Quill. Two is you can go through Dun & Bradstreet’s Credit Builder, which may or may not give you what you need.

Ty Crandall: Right. Well, it will give you what you need only on Dun & Bradstreet’s reporting.

Joe Fairless: Exactly. But for our goal that we’re trying to accomplish, which is getting business credit, when we ultimately go to the company that we get business credit from, they might not recognize just Dun & Bradstreet, so it might not accomplish our goal.

Ty Crandall: Right. So that wouldn’t be your preferred method. Most of your listeners aren’t gonna wanna go that way either way, because there’s a hefty cost involved. And that brings about the third option, which we see a lot of investors choose if they have the credit to do so… Which is you have a good personal credit – a 680 credit score or higher – or you have someone around you that has good credit that will sign as a guarantor for your business. They come in, they use the credit, there is a personal guarantee, and they basically get approved for what are called cash credit cards.

Let’s say, Joe, for example, you’ve got a 690 credit score and you say, “Look, I wanna be able to build my business credit and also get financing to buy investor properties.” Well, you can come in and use your personal credit to qualify with a personal guarantee, to get 50,000-150,000 in unsecured credit, even as a startup. These are credit cards that report to the business credit reporting agencies, not the consumer. So you’re getting them under your EIN. You do have to have good credit for these, you do supply a personal guarantee, but the benefit is that even as a startup you can often get 50k, 100k, 150k in unsecured financing within a few weeks. It all reports to the business credit reporting agencies, so you’re getting actual cash credit you can use immediately, and in doing so it’s for building your business credit at the same time, because it doesn’t report to your consumer reports, it only reports to your business credit reports.

Joe Fairless: That sounds intriguing for sure, so let me make sure I’m understanding. You can get a cash credit card, and in order to do that you either need to have good credit or a personal guarantor, and you get that under your EIN for your business. And as a result of getting that, you can have a — what is the $150,000 unsecured financing in a few weeks? That’s the part that intrigued me.

Ty Crandall: Basically, what will happen is they’re going to mimic your highest credit limit account you have now. So let’s say that you have a credit card on your credit report right now with a $10,000 limit, through whatever – maybe it’s a Visa card, maybe it’s a Sam’s Club card, whatever. Then you’re gonna come in with this program and get about five of those kinds of accounts, that are Visa, Mastercard, AmEx. So you’re gonna come in, they pull your credit, they say “Okay, you’ve got good credit. You’ve got a $10,000 high revolving on the account now, so we’re gonna give you five $10,000 limit accounts. Maybe 10 or 12, right around 10.” You’ll have five cash credit cards that look just like a Visa card, Mastercard you’d use normally, but the difference with these is they all have 0% rates for usually 6-18 months, and they report to the business credit reporting agencies only. So you could max these out and have no impact on your consumer credit, because they’re only reporting to the business credit reporting agencies. Outside of those, they look and feel exactly the same as the consumer credit card that you’re used to. The main difference is they report only to the business reporting agencies.

Joe Fairless: If you have on your personal line of credit a credit card at most for $10,000 limit… And who’s “they”, by the way?

Ty Crandall: Well, there’s sources out there that do this. We offer a lot of different kind of business loans. For example, we work with a lot of different kind of lending companies. There are companies out there that this is all they do – they specialize in unsecured financing using these kinds of business credit cards and lines, that report to the business reporting agencies. So there’s at least 10-15 of these… I refer to them as finance companies.

Joe Fairless: Name a couple, please.

Ty Crandall: Credit Card Builders is one of them, for example. Capwell Funding is another one… Those are two, to name a couple. Hawk-Eye Management is another one that’s out there in that space.. There’s about 10 or more of this type of companies of good size, where all they do is move forward and help you secure this kind of unsecured credit cards, that also report to the business credit reporting agencies.
And not to self-promote at all, but if a customer wants to learn more, we don’t charge anything to help them secure this kind of financing. They can go right to our website, which is CreditSuite.com/getfunding. They can fill in their information there, and then based on their scenario of all the sources we work with – I think 15 more of these sources – we can then help them get placed at whatever is gonna give them the most amount of money. On quick review of their credit, we know who’s gonna give them the most money. We can help them through the whole process, and we don’t charge anything to do that – not on the front, not on the back end. So that might be a shortcut for your listeners.

Joe Fairless: I wanna come back to that one point, but the thought process I was having before I asked the question “Who are they?”, if I have a $10,000 personal line of credit and I say, “Hey, I’ve got an LLC now”, why would they give me five credit cards to match that limit of what my personal line of credit already is?

Ty Crandall: That’s a great point for a couple of reasons. This isn’t something you could do at a bank. It’s not something you could go to Chase or discover any of these sources direct to do, and that’s why these companies exist that help you through this process, because what they’re ultimately doing is they will be able to look at a report and know the best sources that will give you the highest amount of approvals and the best terms.

What they will do is they will go in and apply for these all around about the same time, so they’re not securing five times the amount of credit through one source; they’re not obtaining five credit cards through one source. They’re ultimately getting you five different cards through five different sources, and the way they’re doing it, the inquiries won’t prohibit you from being able to get approved for that much.

If you went in to your bank, for example, and tried to do this, they would give you one card that equals your highest limit. If you go to Wells Fargo, the bank beside it, they’re gonna see the previous bank’s inquiry and either not approve you or approve you for less. By the time you get to the third bank, you’re gonna be done.

What these sources will do is they will look through reports, and they know exactly who to go to to get you the most amount of credit. They do it in a timeframe where the inquiries won’t prohibit your approval of the other sources, and then in doing so they’re able to get you about five times the amount of what your highest credit limit is, or what you’d usually be able to do on your own.

Joe Fairless: Okay. So a lot of people don’t have one credit card that has up to $30,000, and if it’s five times, then 30k times five is 150k. You’d mentioned earlier 150k in unsecured financing in a few weeks – how is that possible for a regular listener who doesn’t have a $30,000 line of credit already with one credit card?

Ty Crandall: That’s what I mentioned… Look, somebody can get 50k to 150k, and that’s usually the range that we see. When you’re getting into somebody that has 700-750 credit scores, those people typically do have 10k, 15k, 20k dollar-limits or higher. We deal with a lot of customers that have 50k dollar-limits or higher at that point… But let’s say somebody doesn’t have that. Let’s say they only have 10k. Well, then they’re gonna get about five times that amount, which is about 50k. Let’s say they have a 5k dollar-limit; well, they’re gonna get about five times that amount, which is about 25k.

Let’s say they have them self and the guarantor, and the guarantor has that 10k dollar-limit, and they have a 5k dollar-limit. There’s a lot of ways to get to a higher number, including that your limits are higher, that you’re bringing in a guarantor and both of your applying being the most common two ways to get the higher limits. But it will typically mimic about five times the amount of your highest limit account, so whatever your listeners have as their highest limit revolving account, they’re gonna get about five times that. If they want more, they need to focus on contacting their card companies to get small increases to their limits, or even bringing in guarantors to help them get more.

Joe Fairless: Basically, let’s say they end up with, in total, 100k dollars, split up between five cards, so a 20k limit per card. If we’re buying a property for 100k, then we’d be maxing out each of those five — not to say we should, but this is the thing… In order to spend a hundred, we’d need to max out each of the five. How do we pay for a house on a credit card?

Ty Crandall: The same sources that help you go through that product or that program also have ways where you can get access to cash without paying the high penalties. Of course, anybody can just take cash out on the card and pay a higher rate to do so. You could do that with any credit card. But they actually have ways – and I’m not exactly sure how they do it – to access the cash from the credit card without paying the 20%-30% rates.

Ty Crandall: Yeah… I mean, Capwell is really one of the best that’s out there. But again, it really depends on the unique situation, and that’s what we found… We’ve worked with 20 or more of these different sources, and for every unique situation some are better than others. Does somebody only have two accounts, or do they have five? Does somebody have some derogatories, does somebody not? Each one of these sources is going to be different based on that person’s unique scenario, and that’s where I threw out that link, because we can always look at it and say, “Look, Capwell is gonna give you the most in your situation”, and help somebody through that process without them having to pay to do so.

Ty Crandall: What we do is we have a business credit building program that helps everybody expedite this process. It gets them access to all different kinds of business loans and financing, including the unsecured financing we talked about, and a lot of others. We’ve got about 30 different types of loan products that people can obtain or can access to get capital for their business.

Then we also help expedite the business credit building process. We help everybody, even if they don’t have good credit, be able to build a business credit profile and score from scratch, to get to a point where they’re getting this kind of high-limit cash credit accounts without needing a personal guarantee, without needing a personal credit check, and we get them there in about 4-6 months, where they’re getting the high-limit Visa, MasterCards just based on their business credit quality, without that personal guarantee and without the personal credit check.

Joe Fairless: Ty, where can the Best Ever listeners get in touch with you if they wanna learn more?

Ty Crandall: Our main website is CreditSuite.com. If they go to CreditSuite.com/ein, there’s a great guide that maps out more in depth the steps to build business credit, offers more vendor accounts etc. Then they can always go to CreditSuite.com/getfunding and we can then get them pre-approved for the unsecured program we talk about, amongst the 30+ other funding programs where we can help them access capital as well.

Joe Fairless: Best Ever listeners, I hope you enjoyed this, as did I. As with all conversations, you’ve gotta do your own due diligence, do your own research. Ty, I appreciate you walking us through the three ways to build business credit. One is vendor accounts, for example Quill. Two is through Dun & Bradstreet’s Credit Builder; it costs a little bit of money, and it may or may not be relevant for what we ultimately need. Three is to have good credit or a personal guarantor and get a cash credit card under your EIN.

Thanks so much for being on the show. I hope you have a best ever weekend, and we’ll talk to you soon.

Once a duplex, now a two story multiplex…these are the projects our guest loves to take on. He’s thinking outside the box, and it’s grabbing him a larger ROI. Yes, the risk is still there, but hear how he incorporated an UBER designated parking area to make a project work!

– Owner of Erik Stark Company and Host of Inner Circle (Real Estate) Podcast
– Current focus is building homes and rezoning land to build high density multi family apartments but still wholesales
– Investing for 10+ years, full time, stopped counting at 400 deals (a few years ago)
– Based in Deerfield Beach, Florida
– Say hi to him at http://therealerikstark.com/
– Best Ever Book: Oh the Places You’ll Go by Dr. Suess

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

– Acquisition & Business Developer at Synergy Redevelopers, LLC; a real estate solutions company
– Buys, renovates and sells residential real estate to the wholesale and retail market
– Been recognized by Widener University for his innovative approach to business success
– Based in Ponte Vedra, Florida
– Say hi to him at http://www.SynergyRedevelopers.com
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Problems promote Solutions, and it was no different with our guest facing a big meth break out in a mobile home community which he purchased. Now he’s cashing in big time charging lot rent, and he got banks to comply. Hear how he did it and what he told the men with the money.

– Full time real estate investor and general contractor
– Completed over 100 rental properties a mix of single family, multi-family, and commercial
– Former Army Officer who served in Iraq in 2003, Awarded the Bronze Star
– Former President Salvation Army Advisory Board
– Based in Panama City, Florida
– Say hi to him at 580-258-8888
– Best Ever Book: The Book of Proverbs

Made Possible Because of Our Best Ever Sponsors:

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

He now makes some sweet profits every month as a wholesaler, but it all started at a grass roots level. Our guest started as many do, as a birdog. Sniffing for deals is mandatory before closing on them, and that’s what he did. He now has a team and is steadily growing.

You find the deals. We’ll fund them. Yes, it’s that simple. Fund That Flip is an online lender that provides fast and affordable capital to real estate investors. We make funding your projects easy so you can focus on what you do best…rehabilitating homes.

Business is primarily made of solid connections, and what better connections are made in real estate than your local REIA? Join our guest as he walks us through some deals that are large syndications he would not have found without the help of the connections he has.

– Investor Relations at Apartment Holdings USA; acquires apartment buildings in need of reposition
– Purchased 1st investment property in 2011; since started two companies focused on acquiring real estate properties
– As a broker he has produced over $400,000 of sales revenue within 5 years
– Ranked One of Top 25 Independent Agents 4 years in a row from group of over 300
– Based in Orlando, Florida
– Say hi to him at http://www.apartmentholdingsusa.com
– Best Ever Book: The One Thing by Gary Keller

Want an inbox full of online leads? Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Most investors do not have the stomach to do what our guest did remotely. He purchased a Memphis multi family in a war zone with 0% occupancy and turned it around in just over a year! Hear how he did it and what he had to do immediately after close of escrow!

General contractors come in all shapes and sizes, and we mean jobs. Your typical general contractor may be skilled at renovations, but wouldn’t have a clue what to do with new construction. In this episode you will learn what to look for, enjoy!

You probably wonder what he did, he simply did real estate. He found more buyers and sellers by doing more moneymaking activities in real estate. He started as a broker and jumped into several investment opportunities. Hear how he did it!

– Founder and President of the real estate investment firm “The Note House”
– Creator of the world renowned “Resourceful Real Estate Academy” and “Resourceful Entrepreneur Academy”
– Closed thousands of real estate transactions, tens of millions in purchases and sales in over 30 markets in U.S.
– Author of The Winners Advantage, The Resourceful Real Estate Academy, and Yes You Can
– Based in Dunedin, Florida
– Say hi to him at fabiancalvo.me
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

–Host at Radical Personal Finance Podcast; teaching how to achieve financial freedom in 10 years or less–Financial planner that mixes creative approaches, deep-dive financial planning techniques, and business strategy–Based in West Palm Beach, Florida–Say hi to him atwww.RadicalPersonalFinance.com

Want an inbox full of online leads?

Get a FREE strategy session with Dan Barrett who is the only certified Google partner that exclusively works with real estate investors like us.

Today’s guest has been on the show, and he is an expert at managing big money. If you recall on episode 447 he manages the family office for billionaires. In this episode you hear his five steps to raising private capital.

You are probably wondering “What else does my business need!?” Well, have you written a book yet? Today’s guest is an investor/ghostwriter who writes for big name speakers in the real estate industry. Of course she can’t disclose who she helps, but you can bet she has big clients as her charge has now hit the $7,500 range for a basic book. Turn it up!!!

Today’s guest has assisted many new students in the real estate investing realm of Wholeseller. He started out as a landlord and later changed his business plan into a fix and flip/wholesale operation. With an extensive buyers list and a fleet of new investors, our guest helps them achieve their goals while they help him achieve his.

West Palm Beach, Florida, you thought it was difficult to find cash flowing deals in such a hot market, well look no further as our guest finds them all the time! She is a broker that meets with investors yearly who come from out of state and out of the country to purchase investment properties in one of the hottest areas of the nation, you can’t miss the show!